Death of a Member: Lord Maples
	 — 
	Announcement

Baroness D'Souza: My Lords, I regret to inform the House of the death of the noble Lord, Lord Maples, on 9 June. On behalf of the House I extend our sincere condolences to the noble Lord's family and friends.

Social Care: Legislation
	 — 
	Question

Baroness Wheeler: To ask Her Majesty's Government what is the timetable for the draft Bill to modernise adult care and support in England announced in the Queen's Speech and to what extent the proposals in the Bill follow the recommendations of the Dilnot commission.

Earl Howe: My Lords, the Government have committed to publishing a draft Bill for pre-legislative scrutiny this Session, and will outline plans for transforming care and support in the forthcoming White Paper. The Dilnot commission's recommendations are hugely valuable. However, implementing them would have significant costs, which must be considered in light of the growing demand for social care, and of other priorities. We will set out the way forward in the progress report alongside the White Paper.

Baroness Wheeler: I thank the Minister for his response. However, with local authorities having to cut £1 billion from current social care budgets, does he not agree that there must be a package of reforms that will embrace current and long-term funding solutions, as well as the legal framework proposals expected in the White Paper and Bill? Will he reassure the House that the progress report accompanying the White Paper will contain a clear timetable for consultation on funding issues? Will he also reassure us that the Government intend to honour the Prime Minister's pledge to deal with social care funding in this Parliament?

Earl Howe: My Lords, this is the first reform of social care law in more than 60 years. It is a unique opportunity to get the legal framework right. That is why we have deliberately taken time to engage fully with those who have experience and expertise in care and support. Many people in the sector have called explicitly for scrutiny on a draft Bill, so publishing a Bill in this way demonstrates our commitment to working in partnership. We remain absolutely committed to introducing legislation at the earliest opportunity in this Parliament to establish a sustainable legal framework for adult social care. The draft Bill will be the critical next step in delivering the reform agenda.

Baroness Finlay of Llandaff: Will the Government reassure us that in considering adult social care they will also take into account the transitional needs of children with very complex needs as they grow older and transition to adult care, because many of them are in the last phase of their illness and will die in early adulthood?

Earl Howe: The noble Baroness raises the key issue of transition, which will be covered in the forthcoming White Paper.

Baroness Barker: My Lords, the Government will be aware of the report, Reforming Social Care: Options for Funding, published by the Nuffield Foundation in May. What is their response to the proposal that some universal benefits that currently go to wealthy pensioners should be restricted to enable the implementation of the Dilnot report?

Earl Howe: My Lords, my noble friend raises an issue that has been very much in our sights as we have prepared the progress report on funding. I can only ask her to be patient a little longer until the report is published.

Baroness Pitkeathley: My Lords, the Minister will know that many older people are concerned not only about how they will fund residential care, should they need it, but also about its quality. How will the White Paper ensure adequate and indeed satisfactory quality for the delivery of residential care, and also the competence of those who deliver it?

Earl Howe: As the noble Baroness will know, one of the main reasons that we wanted to engage widely in recent months with the sector was the very issue that she raised. The quality of social care, the training of those in the workforce and the supply of carers, both paid and unpaid, are concerns going into the future. As the noble Baroness will find out, this will be a major focus of the White Paper.

Baroness Greengross: My Lords, will the Minister reassure some of us who have worked closely with the Dilnot recommendations that the Government will take into account the huge savings to the NHS which, following the initial costs, will result from implementing the proposals? The cost of implementation is very limited compared with the huge annual costs of such care to the NHS. Adequate social care will remove much of that from the NHS.

Earl Howe: I take the noble Baroness's point. Nevertheless, she will recognise that Ministers in government cannot ignore cost pressures arising from proposals such as those of Dilnot. We have calculated those costs at £2.2 billion. This is not money that can be drummed up easily. Nevertheless, we are looking at ways in which to address that particular issue.

Baroness Gardner of Parkes: My Lords, is the noble Earl telling us that the Bill will be only about funding? Following the point raised by the noble Baroness, Lady Pitkeathley, can he assure us that there will be some sort of new training for those who will be doing a job that is half-way between that of a carer and that of a nurse? By losing the SENs we have lost a very powerful and useful facility that can operate in the middle. Surely there is a need for someone to bridge the gap between health and social care.

Earl Howe: My Lords, my noble friend raises an important issue, and I am sure that there will be an opportunity during the Bill's passage to debate the subjects to which she referred. The draft Bill will be published after the Government publish their White Paper and the progress report on funding, and the Bill will set out the legislative framework for adult social care in the future. I have no doubt that noble Lords will wish to raise issues pertinent to that.

Baroness Hollis of Heigham: My Lords, the Minister has referred to drumming up finance for long-term care for older people. He will be aware that higher rate tax relief on pensions-as part of the total of £30 billion of tax relief-amounts to £7 billion a year. Were that money ring-fenced and redistributed within the same age group it could pay for Dilnot three times over. Will he consider looking at that as a source of funding for Dilnot?

Earl Howe: I shall make sure that the noble Baroness's suggestion is fed in to the discussions currently in train on that subject.

Lord Skelmersdale: My Lords, recent press reports-in fact, they are not that recent-have concerned the quality of care, not least the care given by care assistants. In their consideration of this matter will my noble friend and his department consider the registration and suitability of care assistants?

Earl Howe: My Lords, as my noble friend will recall, we debated this subject extensively during the passage of the Health and Social Care Act. The Government's position is that voluntary assured registration is the way forward for the time being. However, we have not closed our minds to statutory regulation in this area.

Health: Local Healthwatch Organisations
	 — 
	Question

Lord Collins of Highbury: To ask Her Majesty's Government what progress is being made on establishing local Healthwatch organisations and what steps they will take to ensure that their commissioning and administrative costs are kept to a minimum.

Earl Howe: My Lords, 75 local Healthwatch pathfinders have generated learning for all local authorities to use. The Local Government Association is working with all local authorities, including holding a series of master classes, and the Government are undertaking targeted engagement on local Healthwatch regulations until mid-June. The Government have made £3.2 million available for start-up costs and information is being made available on commissioning and procurement options.

Lord Collins of Highbury: I thank the Minister for that response. Only one local Healthwatch organisation will be contracted in an individual local authority, but the body itself will be permitted to subcontract most if not all of its activities. What are the department's estimates for the overall cost of multiple contracts, solicitors' fees and all the other on-costs of commissioning? Can the Minister also explain how fragmenting local Healthwatch organisations in this way will provide the strong and co-ordinated voice for patients and their carers that we need for real local scrutiny and accountability?

Earl Howe: My Lords, the noble Lord is absolutely right to raise the question of the cost-effective commissioning of Healthwatch and I have no doubt, from the Local Government Association, that both the efficient and effective functioning of Healthwatch is something that is well within its sights. The noble Lord has raised a series of hypotheses which I think are somewhat extreme, of local Healthwatch organisations parcelling out their functions all over the place. Our aim is to have as locally inclusive a body as possible in each local Healthwatch area to enable Healthwatch to perform its functions as much by itself as with the aid of others. Indeed, the pathfinder events to which I have referred have been clear that there is a local appetite to do that.

Lord Kakkar: My Lords, how do Her Majesty's Government propose to mobilise interest, enthusiasm and participation in local Healthwatch organisations by patients and members of the public?

Earl Howe: We are working with the Local Government Association and the Care Quality Commission to provide support for the implementation of local Healthwatch organisations. As I mentioned, the LGA is running a series of master classes for local authority commissioners. It has published 15 case studies taken from the 75 Healthwatch pathfinders, and a small number of Healthwatch experts will be available to help spread learning. As regards making the public aware, it will be very much for local authorities to decide what is appropriate in their particular areas in order to ensure that patients and the public are engaged in the important work of Healthwatch and understand what the statutory remit of local Healthwatch consists of, because that is the only way in which local Healthwatch will make its voice truly heard.

Baroness Masham of Ilton: My Lords, will local Healthwatch members be able to support members of the public if they go to a tribunal?

Earl Howe: One of the potential functions of local Healthwatch is to act as a support in terms of advocacy for local people and to signpost patients and the public to appropriate services. It is too early to say which local authorities will commission what services from local Healthwatch in an area, but the resources available to local Healthwatch have to be borne in mind in that context.

Baroness Cumberlege: My Lords, does my noble friend agree that in the light of the comparative studies that have been made between different health systems in developing countries, it is very disappointing that the National Health Service comes last out of seven when it comes to patient and public involvement? It does well on other factors but not on this one. Does my noble friend agree that although taxpayers' money must always be very well spent, really strong patient and public involvement will ensure that healthcare is improved?

Earl Howe: My Lords, I firmly believe that, and that is why the NHS outcomes framework specifically includes a domain relating to patient experience. As we go forward, I think patients will come to realise that their voice really counts. It is about a culture change-I do not wish to wriggle out of that. This is not going to happen overnight, but it is very important that commissioners and providers in the health service are fully engaged with patients, and vice versa, to ensure that the patient's voice-and indeed the patient's needs-are right at the centre of commissioning and provision.

Lord Brooke of Alverthorpe: My Lords, on the same theme, if patients are to be at the centre of the new arrangements, and the Government are handing this over, at least for the time being, to local authorities to ensure that they are participating in the new structure, is the Minister content that this arrangement will truly ensure full patient involvement right across the whole country? When will there be a review of the arrangements if they are not working?

Earl Howe: My Lords, of course we want to see the system working properly. It will be part of the role of Healthwatch England to provide information and best practice advice to local Healthwatch to make sure that local authorities are commissioning both effectively and efficiently. In that sense, there will be national oversight of what happens. Inherently, with the reports that local Healthwatch organisations will have to produce annually on the way that they fulfil their role, there will be transparency on how effective they are being, not just in delivering services but in involving all sections of the community in what they do.

Justice: Sentencing of Young Offenders
	 — 
	Question

Lord Sheldon: To ask Her Majesty's Government what action they are taking to avoid the unnecessary sentencing of young offenders.

Lord McNally: My Lords, the Government are introducing reforms to give professionals greater flexibility to resolve offences without the need for prosecution, if this is in the public interest. However, robust community sentences, and where necessary custodial sentences, will continue to be used for the most serious and prolific young offenders.

Lord Sheldon: My Lords, I thank the noble Lord for that reply, because it is rather useful. However, there is one problem in avoiding any unnecessary sentencing of young offenders: the age of criminal responsibility, which is 10 years in England but 15 years in Nordic countries, so there is a big difference there. There has also been a United Kingdom-wide financial programme to help young people to fulfil their potential. Will this programme be used to help the young offenders?

Lord McNally: My Lords, first, on the question of the age of criminal responsibility, the argument that has been put forward by successive Governments is that keeping it at 10 allows the support services to intervene early and positively with young offenders who have committed serious offences. I think the Scots have already moved or are about to move to 12, and, as the noble Lord rightly said, other parts of Europe have higher ages. All I can say is that at the moment, as with our predecessors, Her Majesty's Government have no plans to review that minimum age-for that reason of intervention.
	On the question of help for young offenders, again, following on from the progress made by our predecessors, we are trying early intervention to help to identify the problems behind some of the offences, and that will certainly continue.

Lord Dholakia: My Lords, does my noble friend agree that there has been a significant reduction in youth crime that is mainly attributable to the work of the Youth Justice Board, which deals with offenders up to the age of 18? Will he consider extending the remit of the Youth Justice Board to deal with young adult offenders up to the age of 21 to see whether this pattern can be repeated?

Lord McNally: Like the age of criminal responsibility, this matter is kept under review. There are certainly indications that more holistic intervention by youth offending teams has led to a significant fall-off in youth offending, and there are lessons to be learnt from that. As always with these matters, the question is how much further up the age group one can carry interventions such as that without severe resource implications. However, my noble friend is right to draw attention to the 18 to 25 group, where a lot of criminality that lasts for a lifetime starts becoming embedded.

The Lord Bishop of Chester: My Lords, I speak with experience of the restorative justice programme at Thorn Cross young offender prison in my diocese, which has demonstrably effective results. Where in government policy will the support be for creative and effective restorative justice programmes that help young offenders to come to see the consequences of their actions?

Lord McNally: My Lords, the Government hope to publish in the near future a White Paper on the criminal justice system. Having seen some early drafts, I know that we will bring forward some positive proposals on restorative justice, because, as has been said, there is every indication that restorative justice has a significant and beneficial impact on reoffending.

The Earl of Listowel: My Lords, I welcome what the Government are doing. However, given that half of children in the juvenile estate have experience of being looked after by their local authority and a quarter of adults have similar experience, and given the particular worry about young people leaving the care of their local authority and moving into bed-and-breakfast accommodation, will the Minister discuss with his colleagues the possibility of a review of services for looked-after children, including children in children's homes, and care leavers? Will he also discuss with colleagues the example of the Scottish Institute for Residential Child Care, which provides a centre of excellence in a university to train staff in children's homes, to research looked-after children's services and to influence policy, which we do not have in this country?

Lord McNally: My Lords, as so often, the noble Earl puts forward some very sensible suggestions, which I will follow up. Anyone who has been involved with our criminal justice system must be slightly shamed by the fact that a large number of young people who find their way into it as adults have been in our care as children.

Baroness Royall of Blaisdon: My Lords, the Minister rightly spoke warmly of the work of the Youth Justice Board in answer to the question from his noble friend. Does he recognise now that it was wrong for the Government to propose the abolition of the Youth Justice Board in the Public Bodies Bill and to have fought so tenaciously for it?

Lord McNally: As always, the Government listen extremely carefully to this House. In this case, the House was wise, and the Government were wise to listen to it.

Lord Roberts of Llandudno: My Lords, do those who have offended and have been penalised in one way or another have greater difficulty in finding jobs when their sentence ends? We know that 23% of young people between 16 and 25 are out of work. How much more difficult is it for those who have offended?

Lord McNally: I would have thought that it would be difficult. If you get a criminal record, it becomes a problem in employment. That is why part of the thrust of the Government's policy on young people offending is to try to keep them out of the criminal justice system and to give those with responsibility in this area greater flexibility in their treatment. As my noble friend has said, it is also a question of making sure that young people are kept in the education system. Where full-time education is not the most appropriate route, apprenticeships and other forms of training should be there.

Baroness Sherlock: My Lords, is the Minister aware that about a half of those convicted for riot-related offences, certainly at the time the Riots Communities and Victims Panel published its report, were 18 to 24 year-olds? If he does not feel that he can give additional resources at the moment to enable the Youth Justice Board to take over, how else can he address the problems of that age group? After all, if we have another set of riots, that may be money well spent.

Lord McNally: What I can say is that there is a White Paper in the offing on these areas. It does not take a great deal of homework to identify that age group as perhaps the next best group on which to focus the intensity of care that has been shown in the youth justice system. If we could get anywhere near that success in the 18 to 25 group, we would have a real chance of cutting reoffending, which is the real problem in our prison population and in general levels of crime.

Education: 16-19 Bursary Fund
	 — 
	Question

Baroness Benjamin: To ask Her Majesty's Government how they are planning to measure the impact of the 16-19 bursary fund on young people's participation in education.

Lord Hill of Oareford: My Lords, the Government publish annual and quarterly statistics on young people's participation, and we monitor the take-up of the bursary by 16 to 19 year-olds. In addition, we have commissioned an independent evaluation to examine both the process and the impact of the new bursary fund. In order to provide a valid comparison with the impact of the EMA, the study will run until July 2014 and be completed by the end of 2014.

Baroness Benjamin: I thank my noble friend for that reply. I am sure that he is aware of the Government's post-16 transport guidance, which clearly states that local authorities should ensure that accessible and affordable transport is available for all young learners. Research done by the children's charity Barnardo's-I declare an interest-suggests that many local authorities are not complying with the guidance. Young people mainly use the bursary fund to pay for their transport, and have to pay the full adult fare to colleges and schools. By providing affordable transport, local authorities will reduce the financial pressure on disadvantaged young learners, which is causing many of them to consider leaving their courses. What measures are the Government taking to remind all local authorities of their duty and obligation to provide subsidised travel for young learners?

Lord Hill of Oareford: As my noble friend says, local authorities are under a statutory duty to ensure that they make reasonable arrangements for young people post-16 for transport. The Government are monitoring the provision made. We will continue to remind them of that duty. As my noble friend also says, one of the purposes to which the 16-19 bursary fund can be put is to pay for transport costs. Particularly for providers in rural areas, that is an important use.

Baroness Howarth of Breckland: My Lords, the parents of young people with severe disabilities are extremely anxious since funding has transferred to local authorities. There is uncertainty that funding will remain not only for travel, through bursaries, but for places. Can the Minister assure me that local authorities will be required to ensure that those young people-some of the most vulnerable-are given the opportunities of their peers?

Lord Hill of Oareford: I very much agree with the noble Baroness about the importance of making sure that the group she talks about has those opportunities. The bursary fund has a specific sum, £1,200 a year, which is available to such groups to help with costs. As she knows, our proposals for reforming special educational needs generally, with the Bill to come, cover how we can try to increase such provision. Obviously, local authorities have an important part to play in that as well.

Baroness Jones of Whitchurch: My Lords, is the Minister aware that since the very popular education and maintenance allowance was replaced with a discretionary fund allocated by individual colleges, huge discrepancies are arising in the grants available, with young people in some of the poorest parts of London, for example, receiving the least? How can that be fair, and what are the Government doing to protect young people from the postcode lottery funding under the new scheme?

Lord Hill of Oareford: As we have previously debated, the Government decided that we had to change the EMA because it was going to 45% of all 16 to 19 year-olds and we did not feel that was a targeted measure of support. I recognise the purpose that lay behind it, but we felt that in a difficult time we had to make some savings. We have managed to reduce the costs by £380 million. There is the element that goes to the neediest children; that £1,200 a year is a fraction more than they would have received under the old system. However, we have taken the view, which I know is different from that of the previous Government, that local institutions such as schools and colleges should decide how to allocate the funds. We have put enough in there-£180 million-to pay the equivalent of the old EMA to 15% of that age group, which is about the proportion who were in receipt of free school meals.

Baroness Brinton: My Lords, given that three times the number of students who study in further education colleges come from backgrounds which would entitle them to free dinners, can the Minister explain why these young people are denied access to free lunches unlike their counterparts who remain in school and academy sixth forms? When will the Government end this unfair and discriminatory practice, which affects over 100,000 students?

Lord Hill of Oareford: I understand the point and the anomaly to which my noble friend refers. It is true that, unfortunately, there are a number of anomalies in education where decisions on different cut-offs, age ranges and so on have been taken over the years. As regards when we will be able to put it right, I am afraid that, in the circumstances and with the current limited budgets, the honest answer is that I am not able to give her any date. It is the case that the bursary fund can be used to help defray some of those costs and I know that colleges are using it for that purpose.

Hereditary Peerages (Succession) Bill [HL]
	 — 
	First Reading

A Bill to enable the succession of female heirs to hereditary peerages, and for connected purposes.
	The Bill was introduced by Lord Lucas, read a first time and ordered to be printed.

Membership of the House of Lords (Elections) Bill [HL]
	 — 
	First Reading

A Bill to provide for the Standing Orders of the House of Lords to designate certain Members of the House of Lords as elected Peers.
	The Bill was introduced by Lord Selsdon, read a first time and ordered to be printed.

European Parliamentary Elections Bill [HL]
	 — 
	First Reading

A Bill to amend the European Parliamentary Elections Act 2002 so as to alter the method used in Great Britain and Gibraltar for electing Members of the European Parliament.
	The Bill was introduced by Lord Teverson, read a first time and ordered to be printed.

Business of the House
	 — 
	Motion on Standing Orders

Moved By Lord Strathclyde
	That Standing Order 40 (Arrangement of the Order Paper) be dispensed with on Thursday 14 June to enable the motion standing in the name of Lord Adonis to be taken before the motion standing in the name of Baroness Jones of Whitchurch.
	Motion agreed.

Electoral Registration Data Schemes Order 2012
	 — 
	Motion to Refer to Grand Committee

Moved By Lord Wallace of Saltaire
	That the draft order be referred to a Grand Committee.
	Motion agreed.

Infrastructure Planning (Waste Water Transfer and Storage) Order 2012

Advisory Committee on Hazardous Substances (Abolition) Order 2012
	 — 
	Motions to Approve

Tabled By Lord Taylor of Holbeach
	That the draft orders laid before the House on 27 February and 26 March be approved.
	Relevant documents: 56th Report from the Merits Committee, Session 2010-12; 42nd and44th Report from the Joint Committee on Statutory Instruments, Session 2010-12; considered in Grand Committee on 28 May.

Lord De Mauley: My Lords, with the leave of the House, I beg to move the first two Motions standing in the name of my noble friend Lord Taylor on the Order Paper en bloc.
	Motions agreed.

British Waterways Board (Transfer of Functions) Order 2012

Inland Waterways Advisory Council (Abolition) Order 2012
	 — 
	Motions to Refer to Grand Committee

Tabled By Lord Taylor of Holbeach
	That the draft orders be referred to a Grand Committee.

Lord De Mauley: My Lords, with the leave of the House, I beg to move the second two Motions standing in the name of my noble friend Lord Taylor on the Order Paper en bloc.
	Motions agreed.

Trusts (Capital and Income) Bill [HL]
	 — 
	Committed to a Special Public Bill Committee

Moved By Lord McNally
	That the Bill be committed to a Special Public Bill Committee.
	Motion agreed.

Arrangement of Business
	 — 
	Announcement

Baroness Anelay of St Johns: My Lords, 37 speakers are signed up for today's Second Reading of the Financial Services Bill. If Back-Bench contributions on the Bill were to be kept to around eight minutes, the House should be able to rise this evening at around our normal target rising time of 10 o'clock. As ever, that guidance excludes speeches from the Minister and the opposition Front Bench. There is one Statement to be repeated today by my noble friend Lord Howell of Guildford on the matter of Syria. That will be taken as close as possible to 5.30 pm. For those taking part in the debate, that means that when a contribution from a Peer ends after 5.30 pm, my noble friend will stand up to make the Statement at that point.

Financial Services Bill
	 — 
	Second Reading

Moved by Lord Sassoon
	That the Bill be read a second time.

Lord Sassoon: My Lords, I am pleased to have the opportunity to debate the Government's proposals for financial services regulation. We have an impressive list of speakers today, including former Chancellors, government Ministers and Cabinet Secretaries, so I am sure that it is going to be a lively and interesting afternoon and evening. I am sure that, like me, noble Lords will be particularly looking forward to hearing from the noble Lord, Lord O'Donnell, my esteemed former boss, who will be giving his maiden speech today.
	A thriving financial services sector is vital to the prosperity of the United Kingdom, and we can be justifiably proud of the country's position as a world leader in financial services. As your Lordships are well aware, though, the UK financial system is emerging from the most serious financial crisis in more than 100 years. The Government are determined to learn the lessons from that crisis, which is why we have initiated a fundamental and wide-ranging reform of the financial services sector. That reform will be delivered not only through important changes to the regulatory system contained in the Bill; on Thursday the Government will publish a White Paper setting out how we plan to implement the recommendations of the Independent Commission on Banking. We are also shaping the international response to the crisis with our counterparts in Europe and elsewhere.
	The causes of the financial crisis were many and diverse. Certainly it is clear that financial institutions took on risks that they did not understand or effectively manage. As a result our banks became among the most heavily leveraged in the world. Northern Rock was offering 120% mortgages, with an excessive reliance on wholesale funding, and the Royal Bank of Scotland's acquisition of ABN AMRO was plainly very risky. It was a deal described by the next RBS chairman as,
	"the wrong price, the wrong way to pay, at the wrong time and the wrong deal".
	However, the regulators also failed to act on the risks that were building up, both in individual institutions and across the system as a whole.
	Let me be clear: the UK's financial regulatory system was not fit for purpose. The tripartite system, made up of the Financial Services Authority, the Bank of England and the Treasury, failed. This was because no one had the single responsibility to monitor the financial system and address the causes of financial instability.
	I was part of the system, as a Treasury official, from the end of 2002 to the end of 2005 and even then, in benign markets, some of the deficiencies of the tripartite were clear. The private sector was already asking who would be in charge in a crisis. When the financial crisis hit, this lack of clarity in responsibility initially meant that there was an inadequately orchestrated response. The FSA, the UK's monolithic financial service regulator, was asked to do too much. On the one hand, it was required to assess the prudential viability of financial services firms; on the other, it was required to police the conduct of those firms. Because of the wide remit of the FSA, process too often became valued above judgment and box-ticking above informed regulation and supervision. This is why the changes contained in this Bill are vital. We are creating a framework based on clarity of responsibility for regulators. This Bill puts the judgment of expert supervisors at the heart of the new system. Instead of dividing responsibility for financial stability, we are putting the Bank of England clearly in charge.
	I will now briefly outline several key themes of the Bill. First, the Bill addresses the widely acknowledged shortcomings of the arrangements in times of financial crisis. This Bill will give the Bank primary operational responsibility for financial crisis management, but the Chancellor of the Exchequer will retain responsibility for any decisions that require the use of public funds. In cases where there is a serious threat to financial stability which puts public funds at risk, the Chancellor will have the power to direct the Bank.
	In order to oversee and address systemic risk throughout the entire financial sector, the Bill creates a powerful new macroprudential body in the Bank of England, the Financial Policy Committee or FPC. The Bill gives Parliament the power to bestow important new macroprudential tools on the FPC so that it can act to address the risks it identifies. The FPC will promote a healthy financial system, but not a zero-risk system. It will be a system that can both thrive on and withstand appropriately managed risk. As my right honourable friend the Chancellor of the Exchequer has said, the FPC should not seek to achieve the "stability of the graveyard", so the Bill recognises that in pursuing a stable financial system, the FPC must not impact on the ability of the financial sector to contribute to sustainable growth in the medium or long term. I know, of course, that the way this is dealt with in the Bill was the subject of some debate in another place.
	Since the Bank of England will be taking on a more powerful role, it is right to consider the robustness of its accountability mechanisms. I want to take this opportunity to highlight the work of the Treasury Committee, which engaged constructively with this Bill in a range of areas, not least the governance of the Bank. We welcome the commitment of the Court of the Bank of England to enhance the Bank's governance arrangements in line with the recommendations of the Treasury Select Committee. As my honourable friend the Financial Secretary to the Treasury set out in another place, the Government will seek to amend the Bill in your Lordships' House to put these enhanced arrangements on to a statutory footing. I will be listening carefully to your Lordships' views on Bank governance as we finalise our thoughts on the appropriate amendments to put forward.
	The Bill also provides for two focused financial regulatory bodies: the Prudential Regulation Authority and the Financial Conduct Authority. I will take each one in turn. This Bill will establish the Prudential Regulation Authority-the PRA-as a subsidiary of the Bank of England bringing together macroprudential policy and microprudential regulation under the Bank. In its role as a microprudential regulator, the PRA will regulate and supervise firms that manage significant risks on their balance sheets. This includes not only banks but insurers and the more significant investment banks. Crucially, the PRA will be required to take a strong, judgment-led approach. Indeed, it will have a specific duty to supervise to ensure that it actively engages with businesses, scrutinises their business models and carries out forward-looking risk assessments.
	The Bill will also establish the Financial Conduct Authority as a focused conduct-of-business regulator. The Bill is good news for consumers of financial services. The FCA will be proactive in securing better outcomes for consumers, with a new competition objective and a new power to ban or impose requirements on products that could cause consumer detriment, enabling the FCA to intervene earlier, before there is evidence of widespread harm. This means that the FCA will be better equipped than the FSA to deal with mis-selling scandals, such as that of payment protection insurance. This morning the Government announced the appointment of John Griffith-Jones as the chair-designate of the FCA. Mr Griffith-Jones is currently UK chairman of KPMG and a professional with many years' experience of the financial sector. His appointment marks an important step forward in the continuing establishment of the FCA.
	The Bill enables responsibility for consumer credit regulation to be transferred from the Office of Fair Trading to the FCA. This transfer will ensure that the consumer credit market also benefits from the FCA's focused remit, proactive approach and wider powers. However, we are clear that securing effective competition in financial services markets will lead to better outcomes for consumers. That is why the FCA will have an objective to promote effective competition in the interests of consumers. It will also have a duty to seek competition-led solutions to conduct issues when pursuing its other operational objectives. For example, the FCA will consider barriers to entry, encouraging switching, increasing transparency and focusing more on the requirements for information of different consumers, including those who are vulnerable or marginalised.
	We are confident that these reforms will make the UK a more attractive place in which to do business. They will help maintain the UK's position as the leading global financial services centre. A more stable and sustainable financial sector will undoubtedly be a more competitive one. However, markets in financial services are not contained by national boundaries. That is why the Bill contains extensive arrangements to ensure that the new regulators co-operate fully with each other in their dealings with international regulatory bodies.
	The Bill's introduction to Parliament was preceded by an intensive process of policy development. It included three separate public consultation exercises, all of which served to improve the legislation now before the House. I take this opportunity to pay tribute to the valuable work of the Joint Committee on the draft Bill, which included a number of noble Lords who will contribute to today's debate. They made valuable contributions during pre-legislative scrutiny and I look forward to hearing them share their expertise today. I look forward to working closely with your Lordships during the Bill's consideration in this House and I welcome the informed scrutiny and expertise that will no doubt be offered.
	The Bill comprehensively addresses the failings of the current financial regulatory system. It makes it clear that the Bank will be responsible for monitoring and ensuring the financial stability of the system as a whole. It makes it clear who leads in the event of a financial crisis. Never again will people ask, "Who is in charge?". It creates two new focused regulators, placing judgment at the heart of microprudential and conduct-regulation. The PRA will be empowered to use its judgment to challenge the excessive and inappropriate risk-taking that led to a run on Northern Rock and the government interventions in RBS and Lloyds TSB. The FCA will be empowered to take proactive steps to regulate conduct in financial markets, preventing detriment to consumers of financial services. I am pleased to present the Bill for noble Lords' consideration. I beg to move.

Lord Eatwell: My Lords, I am grateful to the noble Lord for introducing this important Bill. Its importance can hardly be in doubt, given the core dilemma presented by the place of financial services in the British economy. On the one hand, Britain is a world leader in financial services and a considerable measure of our future prosperity depends on that industry. On the other hand, as we have seen, it is the industry that has greater potential than any other to inflict severe damage on Britain's economy. The goal of regulation is to secure the benefits while minimising the costs and to achieve that in a manner that passes the tests of accountability, clarity, efficiency and transparency. Regrettably, the Bill fails all those four tests.
	It certainly fails the test of clarity, being both complex and incomplete. The Bill is unnecessarily complicated because, instead of drafting a new template for the financial services industry, superseding all past relevant Acts and incorporating the new banking Bill that is yet to be published enacting the Vickers proposals, the Government have constructed a dog's breakfast of amendments to earlier legislation.
	Last week, noble Lords were no doubt surprised to receive a passionate entreaty from the Treasury Committee of the other place insisting that the Bill had been cobbled together with undue haste and had not received adequate consideration-in the case of some clauses, no consideration at all-and providing a checklist of serious failings in the legislation as currently drafted. From these Benches, I can assure the Treasury Committee that its despairing plea will not go unanswered. We intend to devote just as long as it takes to sort out this flawed Bill and thank goodness that the procedures of this House will allow us to do so. I am sure that all sides of the House will support this commitment, since this is essentially a non-partisan Bill. We all have a strong vested interest in getting it right. I hope that the Government will approach our deliberations in that spirit, although their negative performance in the other place was not encouraging.
	The noble Lord, Lord Sassoon, referred to the regulatory failures that have been all too evident in the financial crisis. That there were serious failures is beyond doubt-most notably in the operation of the tripartite memorandum of understanding. But these were less failures of structure and more failures of the then conventional wisdom with respect to regulatory theory and practice. As the Joint Committee on the Bill noted:
	"Successful regulation depends more on the regulatory culture, focus and philosophy than on structure".
	That point was made even more forcefully by Mr. Alan Greenspan in his evidence to the US House of Representatives in October 2008. Referring to the intellectual framework that guided the regulatory stance of the Federal Reserve System, Mr. Greenspan said:
	"This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year".
	That was as true of the thinking of British institutions as it was of the United States.
	In this context it is worth remembering why the tripartite system was created in the first place. One of the key reasons was that the Bank of England had proved to be such a fallible regulator. The cases of Johnson Matthey, BCCI and Barings come to mind. In the latter instance, the Bank's performance was so bad that the Board of Banking Supervision was moved to comment that it would be a good idea if the Bank of England understood the products that it was supposed to be regulating.
	Nonetheless, on the basis of what we have all learnt over the past four years, the fundamental thinking behind the reforms set out in this Bill is clearly well-founded, even if the execution falls a little short. The key thing that we learnt was that focusing on the stability of individual institutions, however large-so-called microprudential regulation-is not enough. The whole is bigger than the sum of the parts; systemic risk is all pervasive and by its very nature cannot be managed by individual firms. Hence the need for macroprudential regulation, spelt out so clearly in the FSA's Turner review. But macroprudential regulation poses major new challenges to economic and financial policy-making. It will necessarily involve measures that cross what has previously been deemed to be the boundary between actions that might reasonably be left to unelected officials and actions that are necessarily the province of politically accountable decision-makers.
	The essence of the macroprudential structures as set out in this Bill is that the Treasury cannot be trusted. Just as it was feared that the Treasury might approach the setting of interest rates with an inappropriate eye to political advantage, and hence the Bank of England was given control over interest rates, so now it is feared that the Treasury will fail to take away the punch bowl of loose credit in order to reap the short-term political benefits of a debt-fuelled boom. Accordingly, the Bank of England is given, via the new Financial Policy Committee, virtually autonomous control over a variety of instruments to manage the supply of, and perhaps later the demand for, credit. In addition, microprudential regulation is also taken into the Bank, in the form of the Prudential Regulation Authority.
	This agglomeration of powers in the Bank of England poses two vital questions. Is the governance of the Bank of England such as to result in accountable, clear, efficient and transparent utilisation of these extraordinary powers? Equally, does the relationship between the Bank of England and the Treasury, as set out in the Bill, meet the test of these four principles? The answer given by the Treasury Committee to both of these questions is a resounding no. We on this side broadly agree with the Treasury Committee, though we differ in some details. We certainly agree that the governance of the Bank should not be a matter for the Bank itself. Our major disagreement with the Treasury Committee's proposals is that they do not go far enough.
	First, with respect to the governance of the Bank, the Government have responded to the evident lack of co-ordination in the crisis by designing a model of perfect co-ordination; namely, that one person should be responsible for everything. The Governor of the Bank of England will chair the Monetary Policy Committee, the Financial Policy Committee and the Prudential Regulation Authority, as well as being in overall charge of the Bank of England's special resolution unit and its payment and clearing and settlement systems oversight department. When he or she has some spare time, this individual will also chair a number of important international committees. Even if it is possible to find the exceptional individual who can effectively take on all these tasks simultaneously, that person will be driven mad, for many of these activities will demand contradictory policies. Moreover, if ever there were a structure likely to result in the dangers of group think, this is it, since the group is a group of one.
	Side by side with the inefficient, unaccountable and untransparent role of the governor is the now anomalous position of the court of the Bank. The Financial Policy Committee is to be a committee of the court. It is envisaged that primary responsibility for determining and keeping under review the strategy for achieving the financial stability objective will sit with the court, although the court will be required to consult the FPC and Treasury, and the FPC may at any time make recommendations to the court. On a moment's reflection, it is clear that the court's composition and powers are simply not up to the job.
	In Grand Committee we will propose wide-ranging reform to the governance of the Bank of England to ensure that it has a structure of decision-making appropriate to the first half of 21st century, rather than to 1694. In particular, we will require a more collegiate form of decision-making and propose measures to improve the accountability of what is, after all, a public institution. I was delighted to hear from the Minister that the Government are searching for good ideas in that area. I think that we have some.
	Given that the governance of the Bank, as the Treasury Committee puts it, falls,
	"well short of what would be expected in a modern institution, whether public or commercial",
	and that this is,
	"especially important given that vitally important decisions made by the Bank's executives, especially during times of financial instability, may not reasonably be made public and therefore be immediately available for scrutiny",
	the next question obviously arises. Are the powers of autonomous action endowed on the Financial Policy Committee and, accordingly, the Bank, appropriately balanced with the need for political oversight by the Treasury of the overall conduct of economic and financial policy? Does the Bill provide for sufficient parliamentary scrutiny to endow the FPC and the Bank with an appropriate level of legitimacy? Again, we believe that the Treasury Committee does not go far enough. The FPC is described by the Government as,
	"a powerful new authority sitting at the apex of the regulatory architecture".
	The mechanisms to ensure democratic accountability of the FPC need to be commensurate with the strength of its powers.
	The most important aspect of the relationship between the Bank and the Treasury is what should be done in a crisis. After all, it was in a crisis that the system failed. This is spelt out in Part 4 of the Bill and in the draft memorandum of understanding on crisis management. The draft memorandum of understanding, which, by the way, is in general far less clear than the old tripartite memorandum, at least makes clear that the Bank is the gatekeeper, defining when the Treasury may play a crisis management role. It is worth quoting the MoU. It states:
	"The Bank has primary operational responsibility for financial crisis management. The Chancellor and the Treasury have sole responsibility for any decision involving public funds. When the Bank has formally notified the Treasury of a material risk to public funds, and either there is a serious threat to financial stability, or public funds are already committed by the Treasury to resolve or reduce such a serious threat and it would be in the public interest to do so, the Chancellor may use powers to direct the Bank. ... Where the Bank is able to manage a financial crisis without public funds being put at risk, it will have autonomy in exercising its responsibilities".
	This is the most extraordinary nonsense, a fetishisation of the use of public funds. First, whatever is happening, the Treasury must wait for notification by the Bank of England before it can act. Given the Bank's record on Northern Rock, that notification will come far too late. But secondly, and more seriously, households may be losing their savings, businesses may be collapsing, and economic activity may be in precipitate decline as the result of financial instability, but if there is no threat to public funds the Treasury is shut out of any active financial stability role until the governor invites it in.
	This betrays a lack of understanding of the mutually reinforcing co-operative role that the Bank and the Treasury need to adopt to tackle macro-risk. This was put very clearly by Jacques De Larosière to the Economic Affairs Committee of your Lordships' House three years ago. He said:
	"Let us not hide ourselves from reality. Often ... fiscal policies can be part of systemic risk".
	The only sensible solution seems to be for a fundamental rewriting of Part 4 of the Bill to allow the Treasury to act when severe financial problems arise without the Bank acting as a gatekeeper. In 2008, the problem was not that the Treasury was too strong, but that it was too weak. To ensure that the roles of the Bank and the Treasury are clear beyond all reasonable doubt and given that the MoU will evolve in the light of operational experience, the MoU itself must be the subject of enhanced parliamentary scrutiny. By the way, the definition in the Bill of the objectives of the Financial Policy Committee, with its peculiar emphasis on leverage, debt and credit growth in the UK, also betrays a worrying lack of understanding of the nature of systemic risk in a global financial system.
	Many other aspects of the Bill require substantial revision by your Lordships' House, ranging from procedures for consultation at all levels, the role of the tribunal in disciplinary cases, to the duty of care that retail financial institutions should exercise towards their customers, and the range of access to financial services and to the procedures for parliamentary scrutiny of the avalanche of secondary legislation that the Bill will stimulate. My noble friends and I are committed to playing a constructive part in that revision. However, at the core of the Bill-the core that we must get right-are the new procedures for macroprudential regulation. If an open and successful financial services industry is to be sustained, it is imperative that an accountable, clear, efficient and transparent mechanism for the management of systemic risk is established. Moreover, that mechanism must have as its ultimate objective the promotion of employment and growth in this country.

Lord Forsyth of Drumlean: The noble Lord has made a passionate and powerful speech about the importance of the Bill. Why have the Opposition agreed that it be referred to Grand Committee for its Committee stage?

Lord Eatwell: Our experience from the Bill establishing the Office for Budget Responsibility, given that everyone was trying to get it right, was that we managed to have a very constructive debate. The noble Lord, Lord Sassoon, was constructive in accepting numerous amendments from the Opposition and we felt that detailed debates on complex matters could be conducted more effectively in that less formal arena.

Baroness Kramer: My Lords, I am trying to do this for the first time by reading from an iPad, in order to become more technically capable.
	We are all agreed in this House that the Bill is in need of significant work and study. It has had a review in the other place but, as always, such a review was reasonably limited. However, we have the advantage of a range of committees that have contributed knowledge, expertise and a great deal of evidence for us to use as we address the Bill. I do not share the gloom of the noble Lord, Lord Eatwell, but I agree that substantial changes can improve the Bill and achieve the goal that we all hope for.
	Perhaps I may make some general comments. The Bill essentially looks back, as do all Bills that deal with regulation-in this case to the crisis of 2007 and 2008. It is therefore framed around risk avoidance-both systemic risk and micro risk. All such legislation tends to be backward looking and, as a consequence, the emphasis throughout the Bill is on financial stability. I would argue-as I suspect others in this House would-that the regulator, who will presumably be in place for many years, and the underpinning regulation that will exist for many years, must encompass issues of economic growth. One can make a tortuous argument that if growth is not achieved, financial stability becomes at risk, but the Bill and the role of the FPC in particular have to recognise the economic growth objective. I very much hope that as we proceed with the Bill we find ways in which to do that. The Chancellor has, in a sense, set the challenge with his phrase of wanting to avoid the "stability of the graveyard".
	There are a number of areas on which I suspect our discussions in Grand Committee will focus. The first is accountability and transparency-what might be called the "sun king" issue. The noble Lord, Lord Eatwell, has described that in some detail, but we can say without disparaging any individual who is the Governor of the Bank of England, either now or in the future, that putting so much power and responsibility on to one individual is a matter that requires extremely serious scrutiny and one that we must in many ways question. The danger of group think, which the noble Lord mentioned, is one of the key problems we have seen. Challenge somehow has to be built into this system so that we do not constantly look backwards to the risks that we are aware of and fail to see those that are coming towards us, because it is always the unexpected that causes trouble the next time around.
	I am glad that the Government have said that they will look at the role of the court. Many people in this House are supportive of the proposals put forward by the Treasury Select Committee and the Joint Committee, which did such excellent work in pre-scrutiny of the Bill. Issues of transparency again fall into this arena. We will have to study carefully what goes into the Bill and what sits in secondary legislation, and how that balance is to be handled. I suspect that some of us will question the slow pace that the Bank of England has adopted as regards engaging in a proper review of the lessons to be learnt from its behaviour and performance during the financial crisis, and the narrow remit that has been given to such reviews. That stresses the importance of the court.
	The second set of issues that we will certainly address in great detail is generally known as the "twin peaks" strategy. I am not entirely convinced about this but I am very much open to persuasion. However, coming at it very much from the outside, this looks more like a small mountain range than twin peaks, with the Treasury, the Bank of England, the MPC, the FPC, the FCA and the PRA-frankly one can keep adding to the list. There is a tendency in British government to operate in silos. This is obviously partly down to culture but I believe that the direction that we give in this legislation can help to challenge that. Culturally, it is going to be extremely difficult to cope with regulation as we move forward because the kind of culture that needs to be inherent in the FCA is very different from the one that will be present in the PRA. One can see the PRA adopting the notion that it is the hard man with the FCA being in some ways the soft man throughout all this. I suspect that maintaining real exchange, communication and proper challenge throughout all this complexity is going to be exceedingly difficult and we have a pattern to set here.
	This regulator, in its various forms, will be looking out at the European Union, which, after all, is the source of much financial regulation. I recognise that there will be a co-ordinating committee but I think we are all going to need some convincing that communication will work appropriately. It is a case not just of making sure that in conversations with the EU all UK regulators talk from the same page but of making it clear to those within the EU and beyond whom they must communicate with and how. It strikes me as an exceedingly difficult programme to put together. Although it is a real challenge, again I am willing to accept that it is a question of culture as much as of language within the Bill, and that we can discuss and establish some kind of framework.
	The question of competition concerns me. We talk about competition and the kind of context that the FCA will use, but the barriers to entry into the banking sector are very much impacted by the way in which the regulator behaves and has behaved. There has been one new bank in the past century. When it still takes individuals who are reasonable and well financed two and a half years and costs between £25 million and £35 million to get through the regulatory process, I would argue that that is failure, and I do not think that the regulator has taken that crucial point on board.
	When we talk about competition and diversity, we should also mention mutuals, co-operatives and social enterprises. I have often talked about the need for local and community banks, and my noble friend Lord Phillips is very involved in these same issues. We have to get the regulator to understand that it is looking not at one homogenous sector but at a sector with different facets which may need very different kinds of regulation. It is often argued that legislation should not favour one sector over another but, frankly, by reinforcing the status quo one could argue that the regulator is in effect engaged in some of that process.
	Many of the other issues that we will want to raise within the context of the Bill, such as consumer protection, peer-to-peer lending and the new financial alternatives, will be dealt with in this debate by my noble friend Lord Sharkey, so I shall resist covering them to make sure that I finish within my allotted eight minutes. However, I specifically want to raise clearing houses-a matter on which I gave the Minister a slight heads up. It sounds like a minute issue but it is the kind of thing that we are going to have to watch for as we go through the Bill. As the House will be aware, European directives mean that derivatives contracts will be clearing on the exchanges and those exchanges will be taking counterparty risk. They are regulated by the Bank of England, not the PRA. Mostly they are not capitalised but are owned by the banks, and one can see a potential crisis coming down that line. We need to have a discussion around issues such as that to make sure that the Bill has the width and breadth that it absolutely needs.
	Going into this legislation, I am very hopeful. It seems to me that this is a challenge that the country has given us. If we run into economic difficulties in the future, at the very least the financial and regulatory framework should be right. It should be transparent and accountable and should respond to the needs of our broader economy. I think that this Bill gives us the opportunity to put that in place and I am glad that the Government have brought it forward.

Lord Turnbull: My Lords, this Bill goes straight to much of what is wrong with our legislative process. It has arrived with many major issues unresolved. Worse still, large areas of the Bill have not yet even been considered. It reminds me of those French paperbacks that we used to buy where the pages had not yet been cut.
	I agree with the noble Lord, Lord Eatwell, that there is a problem with the way in which the Bill has been presented as amending legislation to three other major Bills. That is totally illogical. If the Government were to argue that they were refining the status quo, that would have been appropriate but they are, of course, claiming precisely the opposite. One of the drawbacks of the amending approach, for example, is that it is very difficult to make comparisons between how the MPC and the FPC operate.
	The first question that we face is whether the Bill provides the right solution; it does not in my view. If something fails, one is always faced with the choice of whether to mend it or buy a new one. Of course, the latter is politically expedient as it enables the Government to say that they are sweeping away the faulty structure created by their predecessor. However, that is not necessarily the right answer.
	In my view the existing system could have been improved by a number of changes. The first is the creation of a separate macroprudential responsibility located in the Bank, which would allow it to identify when the economy, the financial system or particular markets were running too hot-or even too cold. That would be a natural extension of its monetary policy expertise. It would enable the Bank to bring to bear certain controls or require the FSA to tighten capital requirements of the organisations it regulates. It was not necessary in my view to transfer the detailed prudential regulation of all financial institutions, large and small, insurance as well as banks, to the Bank of England-something for which it has little experience and which will overload it.
	Secondly, it is curious that the Chancellor and the Treasury appear so little in the Bill, moving under a kind of invisibility cloak. However, the Chancellor, not the governor of the Bank, is ultimately the most powerful player, partly by his ability to co-ordinate policy at the highest level, partly by being the real lender of last resort and partly by providing the key link of public accountability. A judgment has to be made on when it is appropriate to delegate powers to a non-elected body and when the impact on citizens and organisations is such that a degree of democratic accountability needs to be introduced. In my view the extension of the powers of the Bank and the widening of those subject to its actions means that we have gone beyond what was appropriate for it when it was simply a monetary authority.
	Thirdly, the demerger of prudential and conduct of business regulation was unnecessary. It has created a lot of overlap which will produce confusion. A number of processes are effectively shared: business model analysis, enforcement and vetting of key board appointments. My concern, though I need to declare my interest as a director of a regulated insurance company, is that regulated companies will find themselves having to deal with two shops rather than one. So, I would have retained a single FSA but with an enhanced macroprudential function in the Bank, overseen by a Chancellor-chaired council, rather like the US Financial Stability Oversight Council. However, we are where we are and we face the dilemma of the sat-nav lady. Does she tell you to turn round or recalculate your route? Reluctantly, we have to work with what we have and try to improve it.
	I would start with the function of the FPC, which has oversight of the macroprudential function. Currently its terms of reference are rather narrowly drawn, emphasising very strongly the avoidance of risk. Alastair Clark, a member of the FPC, in a recent speech noted that there is a need,
	"to strike the right balance between encouraging banks to strengthen their position and avoiding any undue constraint on the availability of credit".
	This is important because much of the public debate in this country on the current situation is in terms of an antithesis between the tightening of fiscal policy and the loosening of monetary policy. What this misses is that there is a third point of the triangle-the decision of the FPC about the liquidity and capital requirements of the banks. Clearly one of the lessons of the financial crisis is that the banks were undercapitalised for the risks they were taking. There is international agreement that their capital should be built up, but there is no consensus about the speed at which this should happen. There are many who think that the FPC is pushing this too fast and requiring the liquidity to satisfy highly demanding stress tests, thereby nullifying the expansionary effect of the Bank's monetary operations.
	A mechanism will be needed to ensure that we get the best combination of the different policy instruments, which brings us to the question of how we should design organisations to achieve that. One approach might be called synthesis. We should bring interlocking problems under one roof to allow those at the top to produce the optimal trade-off between them. The danger is that if those at the top have a particular bias, one view may be subordinated to another without full debate.
	The opposite approach is the separation of powers or of focus. Organisations will pursue their objectives with a mechanism created above them to resolve differences. The old tripartite system followed this principle but the new arrangements are in the synthesis mould. This means that if the Bank overemphasises the financial stability objective and imposes costs on other functions, there will be nothing to correct it. The cross-membership of the governor and his immediate colleagues on the two committees will be an inadequate substitute and may even exacerbate the problem.
	The Bill includes a number of checks and balances, but they could go further. For example, we could create a secondary objective to support the Government's economic objectives, along the lines of those already provided for the MPC. The latter will have to maintain price stability but, importantly,
	"subject to that, to support the economic policy of Her Majesty's Government, including its objectives for growth and employment".
	The objectives of the two committees should be made symmetrical.
	As with the MPC, the Treasury should be able to set out how the FPC should interpret its remit. We should consider whether the balance of the FPC is correct and perhaps add an additional external member.
	I do not have time to go into the provisions relating to the FCA in any detail. I will simply say that I share the concerns that were expressed about how we can ensure that it operates in a way that is proportionate, fair and reasonable. I particularly commend the analysis provided in a paper published jointly by Herbert Smith LLP and the LSE.
	It is clear that there is a lot of work to be done on the Bill. I hope that we can create something that will last longer than its predecessors.

The Lord Bishop of Durham: My Lords, the Bill emerged from the financial crisis of 2008. Therefore, a lot of the attention of the debate is likely to focus on the prudential issues that have already been mentioned at some length. We look forward to the speech of the noble Lord, Lord O'Donnell, whose great expertise and extraordinary experience over the past few years give us much to hope for.
	However, in looking at the macroprudential issues, we should remember that the complexity of the Bill grew through an extensive period of consultation and debate so that it now covers the whole range of financial services, from things that happen on the streets of Sunderland in my diocese to international loans and bond issues, and the use of derivative instruments that have been behind much of the exacerbation of risk in the system since I first traded them 25 years ago, to the point today where their volume is many scores of times that of the underlying cash transactions. It is no wonder the Bill has become something of a complex monster.
	Given the Bill's complexity it is easy to overlook its impact on the consumer, and particularly the role of the FCA, which is warmly to be welcomed in many ways. At the retail level we are all aware that we have the most concentrated financial services sector in Europe, with decisions taken far from local communities, and that the lack of penetration of mutuals, credit unions and friendly societies-I was very glad to hear the noble Baroness, Lady Kramer, mention this-is unrivalled in the rest of Europe, where there is far greater and more extensive mutual work at local level than in this country. Our societies have diminished very significantly since the 1980s and the period of catastrophic demutualisation that we should all regret so much. The result is that access to financial services in many of the more deprived areas of our society is now very limited, and we come back to the old problem of loan sharking and payday loans. Payday loans, of course, are legal and proper. It is a great relief that they will move from being watched over by the OFT to being supervised by the FCA, with its responsibilities for integrity, consumer affairs and competition under its three main objectives. However, as has already been alluded to, the danger is that these regulatory organisations essentially operate in a negative and protective manner rather than having, as the FCA has, an obligation to introduce more competition.
	The Bill does not seem to provide for accountability and for a measure of what more competition would look like. This must be a serious concern. Contrary to much of what has been said, for example, in Scotland recently by the General Assembly of the Church of Scotland, the answer to the payday lenders is not to limit interest rates as this will simply drive matters back into the hands of the illegal loan sharks. At the moment, if you go outside the Darlington Building Society when the benefit payments come in, you will find a queue of people who will withdraw from their accounts everything but one penny in order to pay it straight into the hands of the loan sharks who are standing by their doors threatening to break up their furniture. Payday lenders do not, of course, operate in this way, but I have numerous examples in my diocese of the serious impact that their high costs have had on people who find themselves caught up in an ever growing cycle of higher interest rates.
	The answer to this is not in limiting interest rates but in providing effective competition from local savings at a mutual level and recreating the system that worked so well from the early 19th century until the 1980s. I fail to see this in the Bill and that gives me great concern. I hope the Minister will explain how the competition obligation will not only reduce the problems of access for banks and for other large organisations-as we have already seen with the co-operatives' problems in taking on the branches of Lloyds Bank-but increase the opportunity for much smaller and more locally based organisations to contribute to their local communities. This will affect a large number of people on the most marginal points of society.
	The other point I wish to raise concerns the governance of the Bank of England, which has already been mentioned. It is an old rule of organisations that robust checks and balances within them are much more effective than external legal constraint. A severe challenge to management from the court will be much quicker in enabling group-think to be destroyed and a creative approach to the problems to be seen than any kind of legalistic approach from a regulator subsequent to the event. I shall not waste the time of the House in expanding on this, save to say that I agree with the views that have been expressed already. I look forward to the Minister's response in explaining how the governance can be strengthened and widened.

Lord Lawson of Blaby: My Lords, the House will have listened with great attention to what the right reverend Prelate has just said with a mixture of expertise and eloquence. It was certainly unusual in one respect; he must be the first speaker from the Bishops' Bench, certainly in my time in the House, who has come out as a former derivatives trader. This adds great weight to everything he said.
	I hope the Minister will pay particular attention to the area on which the right reverend Prelate has focused, as he has on a number of occasions outside this House, of the arrangements and problems associated with payday lending and the people who require and use it. However, I will not follow him further down that route because other things need to be said about this long, highly complex and important Bill, which I warmly welcome.
	Before I turn to the measures in the Bill, there is one thing of fundamental importance that cannot be put into it: the relationship between the Chancellor of the Exchequer of the day and the Governor of the Bank of England. Again, this is of fundamental importance. While it cannot be put into a clause of the Bill, that does not mean that it cannot be institutionalised, and I hope that my noble friend the Minister can reassure me that something will be put in place along the lines of what used to happen in the United States, although I do not know whether it still does. There were regular breakfast meetings between the Secretary of the Treasury and the Chairman of the Federal Reserve. The relationship needs to be institutionalised. Just because they get on well is not good enough. In my judgment, that needs to be done.
	I approve of the broad lines of the Bill. The regulatory architecture that it introduces is a big improvement on what it replaces. As my noble friend Lord Sassoon has already pointed out, the so-called tripartite system introduced by Mr Gordon Brown in 1997 proved to be a dysfunctional disaster and did not cause, but certainly contributed to, the severity of the UK banking meltdown in 2008. What was particularly perverse about the Brown structure was that it destroyed and replaced the greatly strengthened system of prudential supervision that as Chancellor I put in place in the Banking Act 1987, with the indispensable assistance of the then Economic Secretary to the Treasury, my noble friend Lord Stewartby. I am glad to see that he is in his place and I hope that he will speak later today. I should like to refer to two specific aspects of the 1987 Act later in my remarks. While the new architecture is a great improvement, it may not be right in every respect. It will need to be monitored carefully to see how it works out in practice, and I trust that the Government will be prepared to modify it in the light of experience. That will almost certainly be necessary.
	The most fundamental flaw in the tripartite system was not the removal of responsibility for the prudential supervision of the banks from the Bank of England. There is a valid case for that, as I spelt out in my memoirs some 20 years ago. The most fundamental flaw was yoking together in the FSA prudential supervision of the banking system and the conduct of business regulation, in particular consumer protection. Perhaps I may say that I disagree with the noble Lord, Lord Turnbull, on this point, although I agree with some of the other remarks he made. These are two completely separate activities requiring completely different skills, people, cultures and approach. While the intensely detailed, bureaucratic, box-ticking approach may have been appropriate for consumer protection, it was wholly inappropriate for the task of prudential supervision of the banks.
	It was also a serious mistake, in my judgment, to separate responsibility for the stability of the banking system as a whole, which was left with the Bank of England, from responsibility for supervising individual banks, which was given to the FSA. While it is true that there is a distinction between the regulatory system as a whole and the day-to-day supervision of individual financial institutions, at the end of the day the system is the sum of the institutions that comprise it, and regulation and supervision need to be intimately linked. Moreover, the grossest excesses of banking imprudence, although economically devastating when they occur, happen probably at most only once in a generation, while consumer abuses such as mis-selling are ever present and politically sensitive. As we saw, they inevitably became the FSA's principal focus of attention, at the cost of its disastrous neglect of prudential supervision.
	The new architecture proposed in this Bill rightly separates these two activities completely, making consumer protection the remit of the new Financial Conduct Authority. However, it is a mistake to give the Bank of England, through the Financial Policy Committee, responsibility for the oversight of the Financial Conduct Authority. It has enough on its plate as it is.
	I am also unconvinced by the wisdom of having two separate bodies-the Financial Policy Committee and the new Prudential Regulation Authority-to supervise the system and the individual banks respectively. It is quite true that both these bodies will be within the Bank of England, so there is likely to be constant cross-fertilisation, but the practical effect of having two bodies rather than one will need to be carefully monitored.
	The decision to give the Bank of England full responsibility for financial regulation and supervision on top of its responsibility for monetary policy, which may on occasion conflict, places a heavy burden on the Bank in general and the governor in particular. The Government plan to recognise this by having a strong Financial Policy Committee with former practitioners on it and by beefing up the Court of the Bank of England, but I am far from sure that that is enough.
	The Banking Act 1987 created inter alia the Board of Banking Supervision, which has already been referred to by the spokesman for the Opposition in this debate. This was charged with supervising the Bank's conduct of its supervisory responsibilities and was chaired by the governor, but with as part-time members the most effective recently retired bankers that I could find. Moreover, and importantly, if these poachers turned gamekeepers had any concerns about the way in which the Bank was conducting any part of its supervisory responsibilities, they had the power under the Act to insist on a private meeting with the Chancellor, at which they could voice their concerns-a powerful sanction. I urge the Government, even at this late stage, to put in place a body that is more narrowly and expertly focused than the FPC, along the lines of the former Board of Banking Supervision, to supervise the work of the PRA.
	Another innovation introduced by the 1987 Act was dialogue between bank supervisors and bank auditors. Until that time, it was illegal for there to be a dialogue between the auditors and the supervisors, as that would have constituted a breach of the auditors' commitment to client confidentiality. The 1987 Act not only changed that but stated that there had to be a dialogue. Given the extreme and understandable reluctance of auditors publicly to qualify a bank's accounts as they might qualify the accounts of any ordinary company when they discover something amiss, for fear of causing a run on the bank, it is particularly important that they should privately tip off the supervisory authority. Equally, if the Bank of England has a concern, it is important that it should share it, privately, with the auditors of the bank or banks involved, and ask them to look into it more closely. Regrettably, with the Brown changes, the dialogue demanded by the 1987 Act fell into desuetude.
	I am pleased that the Bank of England and the Government have decided to do something about this, and to introduce a code of practice designed to reinstate the dialogue. The Economic Affairs Committee of your Lordships' House, under the excellent chairmanship of my noble friend Lord MacGregor, looked into this in its report on auditors of March last year. I declare an interest as a member of that committee, which unanimously concluded that in the light of experience a code of practice was not good enough and there should be a statutory requirement for the dialogue to take place. That must be right, and I urge the Government to look at it again.
	I will raise two other matters before I leave the subject of bank auditing, which is so important to the task of bank supervision. First, I mentioned the reluctance of auditors to use the nuclear weapon of qualifying a bank's accounts, which may be one reason why they did nothing at all about major banks, which, in the event, turned out to be insolvent and had to be bailed out at great expense to the taxpayer and at massive economic cost. It might be worth considering a system in which, instead of the present all or nothing system, bank accounts are graded in the way in which the ratings agencies grade financial instruments.
	Secondly, it is clear that the change in accounting standards from UK GAAP, which I admit was not perfect, to IFRS is a change from prudence to box-ticking, which has been particularly malign in the case of the banks. This is true not least when it comes to provisioning. Linked with that, IFRS has also enabled banks to this very day to conceal substantial bad debts, the failure to face up to which is a significant cause of their reluctance to lend to small businesses, which badly need it at present. To accept IFRS blindly, with all its faults, simply because other countries do, is not good enough.
	The Bill before us today is not, of course, the only Bill this Session to implement the lessons of the disastrous banking meltdown of 2008. As my noble friend Lord Sassoon has reminded us, we have also been promised a banking reform bill to implement the recommendations of the Vickers commission and in particular to enforce the separation of investment banking from retail banking by the so-called ring-fence. I welcome this, which I have long called for.
	However, one reason why we need this split has not perhaps been sufficiently recognised: that is, that bank supervision is an extremely difficult and complex task, given the unprecedented complexity of modem banking. A system in which the failure of an investment bank does not threaten the core banking system means that the regulators and supervisors can concentrate on the health of the core banking system, a less complex and more practical task. My fear, however, is that the ring-fence will not prove impermeable or wholly effective. Bankers, despite the greed and folly that many of them evinced during the Goodwin-Brown era, are clever people, and they will find ways round it. Moreover, what we are talking about here is, at bottom, a matter of banking culture.
	Earlier this year, the FSA published a report on HBOS-Halifax Bank of Scotland-which has not received the attention that it merited. Finding that the bank was "guilty of serious misconduct", it ascribes this to a culture,
	"of optimism at the expense of prudence".
	That is a nice euphemism for reckless gambling.
	Culture matters and the plain fact is that the prudent culture of retail bankers and the adventurous culture of investment bankers are diametrically opposed. With the best will in the world, it is hard to see how two quite different and opposed cultures can co-exist within the same corporate entity. There needs to be complete structural separation, not just a ring-fence.
	Finally, I turn briefly from the structure to the content of bank regulation and supervision. Progress is being made on the subject of capital ratios and capital adequacy-indeed, with the economy in its present condition, there is an overwhelming case for allowing the banks to go more slowly towards achieving the desired higher capital ratios. Here, I entirely agree with the noble Lord, Lord Turnbull.
	However, there has been no comparable progress in dealing with the problem, which is at least as important, of bank leverage.

Baroness Garden of Frognal: My Lords, I apologise for intervening on my noble friend-

Lord Lucas: My Lords, this is a Second Reading. We are a self-regulating House. Whips have no business telling us what to do. We are listening to my noble friend with great fascination and I hope that he takes another 10 minutes.

Lord Lawson of Blaby: My Lords, I am grateful for that. This is a very important and complex Bill, and we should be able to speak if we are not waffling-and I hope that I have not been waffling-at adequate length. However, I assure the House that I shall not take another 10 minutes.
	No banking system is likely to be stable if it is financed by a mountain of loan capital on an exiguous equity base. Yet that is what we now have. I suspect that this is unlikely to change unless there are two supporting changes.
	First, the bank regulators and supervisors should at least strongly discourage if not actually forbid the remuneration of bankers on the basis of the rate of return on bank equity. Secondly, there needs to be a fundamental change in the tax system as it applies to banks, or at least banks that conduct ring-fenced activities, à la Vickers. At present, a bank that finances itself by raising loan capital finds that the interest paid on that capital is tax-deductible, whereas the dividends paid on equity capital are not, so there is a clear tax incentive in the system for the banks to capitalise themselves on the smallest possible sliver of equity-the very reverse of what is needed in the interests of stability. That should be changed. Interest on the bank's loan capital should no longer be tax-deductible. The quid pro quo might well be the abolition of the blunt instrument of the bank levy.
	In conclusion, I warmly welcome the Bill, but there is much still to be done.

Lord Myners: My Lords, it is an honour to speak in this debate after the noble Lord, Lord Lawson of Blaby, and to express my appreciation for the intervention from the noble Lord, Lord Lucas, which was properly respectful of the rights and procedures of the House on Second Reading.
	I speak with the experience of having been an independent member of the court from 2005 until 2008 and then a Treasury Minister dealing with the Bank of England, and I will focus primarily on the Bank. I agree that this is not a Bill where partisan issues will be found but one where the House should come together to find good solutions. I share the regret that I think lay behind the question of the noble Lord, Lord Forsyth of Drumlean, about why the Bill is being taken in Grand Committee rather than in the full House. This is a Bill that should be taken through the House rather than Grand Committee, but I understand that that decision has been taken through the usual channels.
	Clearly, we must learn the lessons of the past. The tripartite arrangement did not work as well as had been expected in anticipating the crisis, although it is only fair to say that it worked very well during the crisis. In fact, it worked rather better during the crisis than some of the crisis management arrangements that we currently see within the European Union, where they continue to grapple with the problems of the European banks.
	Of course, the tripartite arrangement was not the only regulatory architecture to fail to contain the risks to financial stability. Regulatory architectures failed in numerous forms and in various geographies as part of the global crisis. In my belief and experience, no one architecture is assuredly superior to all others. There can be no certainties brought by architecture alone. Failure of architecture tends to be due to a shortcoming of skills, behaviour or culture. That is where the tripartite arrangement fell short of expectation, rather than architecture. Architectural solutions, as proposed by the Bill, involve simply the movement of organisational boxes. The proposals in the Bill might well work, but whether they work or not will be less to do with the architecture of regulation and more to do with the culture and conduct of those who work within regulation. In practice, there is little that the Bill can do to prescribe or guarantee that the right culture and behaviours are promoted, but it is incumbent on us to make the best efforts to secure such outcomes, or be alert to any shortcomings that might exist in the constitutional architecture of the Bill.
	That brings me to the issues relating to the powers and responsibilities of the office of governor and the role of the Bank of England's court. I am sure that we will spend much time on them when the Bill goes into Grand Committee. Your Lordships' House will need to ensure that adequate internal checks and balances exist on the powers of the Bank and on its officers. My experience of being a member of court from 2005 until 2008 raises considerable concerns about the proposed concentration of power envisaged under the Bill for the governor. There is a very real risk that we might constitutionally perpetuate the current situation in the Bank where there is room for only one point of view-and that has to be the governor's view. Significant steps to reduce this risk would include: having the deputy governors chair the FPC, the MPC and the PRA rather than having those bodies chaired by the governor; requiring the FPC and the MPC to meet at least twice a year in joint session-a meeting in which the Bank's internal appointments would be in a minority, and which should be appropriately minuted; and the giving of a power to the Treasury Committee of a statutory right of veto over the appointment and dismissal of the governor, the three deputy governors and the CEO of the PRA, as is already the case for the chair of the Office for Budget Responsibility.
	A further area requiring close scrutiny will be the membership and role of the court of the Bank. My own experience of being a member of the court was unsatisfactory. Indeed, in 2007 and 2008 more than one member of the court sought private meetings with Treasury Ministers and the Permanent Secretary to express their anxieties about the Bank's detachment from and disinterest in issues of financial stability. Much good work was being done in this area by Bank officials, including Sir Andrew Large, Sir John Gieve, Mr Paul Tucker, Mr Nigel Jenkinson and Mr Alastair Clark, but the governor made clear that the primary focus for the Bank was monetary policy. Financial stability was a tertiary issue, de-emphasised in resource allocation and generally given little focus at court. Indeed, at court we tended to spend more time hearing about the governor's tennis matches with the heads of various other regulatory agencies than about issues of financial stability. In that connection, if my memory serves me right, we were told that one of the governor's partners was the noble Lord, Lord O'Donnell, whose maiden speech we look forward to hearing later in the debate.
	The need for the court to be seriously strengthened and better equipped to engage in constructive challenge of the executive leadership of the Bank must have been very apparent to anybody who read the transcript of the evidence given by the chairman of the court and a number of independent directors to the Treasury Committee last year, in which it was clear that members of the court had a very poor understanding of the resource allocation and budgeting of the bank-and, indeed, of the constitutional differences between the Monetary Policy Committee and the proposed Financial Policy Committee.
	Your Lordships' House will need to give very careful consideration to the membership, statutory powers and responsibilities of the court, to consider whether the Bill should require that the chairman of the court should have experience of financial and prudential issues in order to ensure that debate at court is informed, and to the court also being appropriately resourced. Court minutes should be published and the court should be clearly accountable to the Treasury and the Treasury Committee. The court should also conduct and publish ex-post reviews of the Bank's performance in the prudential and monetary policy sectors and address these reports to both the Treasury and the Treasury Committee. Her Majesty's Treasury should also commission and publish annual reviews of the effectiveness of the court.
	The extent of the change required by the Bank to bring its performance up to the standard required by this Bill should not be underestimated. I have already spoken of the need to devolve more power from the office of the governor to the deputy governors and the need for a move to a more assertive and accountable court. The bank will also need to review its skills and culture. In respect of the latter, it needs to be more open and less elitist-open both internally, being respectful and welcoming to the views of others even when they differ from the prevailing consensus, and externally, being more willing to engage with those involved in business and public policy. In terms of skills in issues of financial stability, the extent of the challenge is clear if you look at the Bank's Financial Stability Report published in April 2007. This was the last Financial Stability Report published before the collapse of Northern Rock. In that report, the Bank stated:
	"The UK financial system remains highly resilient".
	It also stated:
	"Conditions are likely to remain favourable",
	and,
	"Financial innovation and the growing use of credit risk transfer markets have increased the risk-bearing capacity of the system".
	This was after the emergence of the sub-prime problems in the United States.
	The governor's Mansion House speech on 20 June 2007 focused on increasing the number of £5 notes in circulation and the need for the Bank to have greater control over the payments system. It said absolutely nothing of any significance about financial stability. This is the body to which we are proposing to give responsibility for financial stability oversight.
	In Committee, we are going to have to look carefully at the skills, competencies and culture of the Bank and ask ourselves whether it really makes sense to give as much authority and responsibility to an institution that has exhibited its own shortcomings in the past, and in particular to put quite as much power into the hands of the governor as currently envisioned in the Bill.

Lord Sharkey: My Lords, I shall speak about two aspects of the Bill regarding two areas that it needs to cover but does not. I think that it is commonly accepted on all sides that a significant problem facing the economy is the question of lending to small and medium-sized businesses. It is generally accepted that we have been unsuccessful in getting sufficient lending to take place. The Bank of England confirms that the UK's biggest banks failed to meet last year's lending targets. The five banks that signed up to Project Merlin lent £1 billion less to SMEs than their 2011 target-and the Merlin deal has of course not been renewed. The Bank's trends and lending report for April this year reports that in the three months to February 2012 the stock of lending to small and medium-sized enterprises continued to contract, and had in fact been negative since late 2009. In January this year, BIS published a report on SME access to external finance. Among its findings, the report states that 21% of SME employers that sought finance from any source did not achieve success, which was a significant increase on the 8% seen in 2007-08.
	These figures are bad enough, but they conceal areas where there are more significant problems. The effects of the financial crisis are being most keenly felt in those areas of the country that have long been the most deprived. Workless households are concentrated in the old industrial areas of the north of England, the Midlands, Scotland and Wales, as well as in a number of seaside towns and inner-city urban areas. We urgently need to stimulate demand for SMEs in our deprived areas and to make finance available to help them develop. At the moment, according to a 2012 report by the Centre for Responsible Credit, just 4% of all lending to SMEs goes to businesses in the most deprived areas.
	The only data provided by the six largest banks concerning their lending to SMEs are produced on an aggregate basis. This means that there is no information available to allow local economic development agencies, including local enterprise partnerships and community development finance initiatives, to enter into effective dialogue with the banks with a view to assessing and improving performance, nor any way of knowing which banks are performing better than others. Similarly, the current dataset provided by the banks tells us nothing about the terms on which credit is being made available to SMEs. There are other indications that the shift by banks from term lending to overdraft lending will probably lead to a significant increase in financing costs, but we do not know how much or where. We also do not know to what extent, if at all, the banks are supporting the third sector to take advantage of the new rights under the Localism Act. The Act provides for local communities to take over the running of local authority services to build new homes, businesses, shops, playgrounds and meeting halls.
	All this requires planning and funding. That means the active involvement of the banks. We need access to information to show us what the banks are doing, area by area, bank by bank, to support this agenda. All this can be achieved by making a couple of simple amendments to the Bill. I believe that we should consider adding a fourth operational objective to the three set out for the FCA. This new objective could be called something like "the sustainable economic growth objective" and could be defined as ensuring an appropriate level of financial services provision in disadvantaged areas by having regard to the needs of SMEs and third-sector organisations in deprived communities for affordable loans, savings and insurance products.

Lord Forsyth of Drumlean: How are the banks expected to provided more lending at the same time that they are being required to make greater provision for capital and liquidity purposes? Surely that is asking them to do two contradictory things.

Lord Sharkey: I had a more minimalist objective: to make it plain that that is the case with the banks at the moment. We need to make sure that we know that they have an obligation to support SMEs and third-sector organisations in deprived communities. I add in passing that the need for some growth objective is evident not only in this part of the Bill, but in the objective set out for the FPC itself. Stability is a necessary objective, but stability without growth is, at best, a recipe for stagnation.
	The existing objectives for the FCA include a competition objective. This competition objective includes the statement that the FCA may have regard to,
	"how far competition is encouraging innovation".
	Apart from noting that the word "may" should read "must" if the paragraph is to have any real meaning, I also want to note that this is the only time that the word "innovation" appears in the 330 pages of the Bill.
	That brings me to the second area that I want to address. Innovation in the provision of traditional retail financial services is obviously important. The Breedon report, commissioned by BIS and delivered in March this year, estimates that by 2016 there will be a shortfall of between £26 billion and £59 billion in finance needed by SMEs for working capital and growth. In their response, the Government acknowledged the problem and said,
	"The Government welcomes the development of new and innovative forms of finance such as peer-to-peer lending and recognises the potential of these models to have a positive impact on the SME lending market".
	Currently, the total amount of peer-to-peer lending in the UK is small, but growing rapidly, and even more rapid growth is projected. The Government are encouraging growth in this area with a £100 million investment. Earlier this year, Andy Haldane, head of policy at the Bank of England, even suggested that these non-traditional lenders could eventually replace banks, but if these new models are to succeed in providing real and substantial competition for the banks, they need more help from the Government than £100 million in pump priming. At the moment, the non-traditional peer-to-peer lending sector is unregulated. As the Daily Telegraph said two weeks ago,
	"if it is serious about encouraging the growth of a genuine long-term alternative to bank lending for SMEs, the Government also needs to address the thorny question of regulation. At present, alternative funding providers are not regulated by existing financial services legislation, leaving both borrowers and lenders vulnerable to rogue players entering the market".
	Alternative funders are in favour of regulation. They recognise the dangers to their business model of a scandal generated by some rogue entrant to their market. This is not a theoretical danger or a distant prospect and is certainly not a trivial problem. There is nothing to stop such an event occurring and permanently destroying confidence in the peer-to-peer model. As the Daily Telegraph also said:
	"SMEs desperately need a genuine alternative to borrowing from banks and those using alternative funders must be protected so that both they and the market can flourish".
	The Government need to take action now, and this Bill provides the perfect opportunity.

Lord Lamont of Lerwick: My Lords, it is a great pleasure to follow my noble friend Lord Sharkey. He made extremely important points about the availability of finance to the economy, which is crucial. We look forward to seeing how he pursues the issue in Committee, as he said he will.
	I speak on the Bill with some hesitation because I have not taken part in the extensive consultation process and nor was I a member of the Joint Committee. Many people who are present today have done sterling work in that respect. I welcome the Bill, which is necessary and sweeps away the discredited, fractured, tripartite system that failed its very first crisis. Instead, we are to have two new arms of the Bank, which will handle both macro and microprudential supervision, so that a single institution is in charge of keeping the system safe. At the same time, we will have a free-standing, independent consumer body, the Financial Conduct Authority.
	My main point this afternoon relates to what several noble Lords have said and the relationship of the macroprudential side to the current regime of inflation targeting. As Chancellor of the Exchequer, I introduced the inflation objective for the Bank of England in 1992. That was broadly the same framework that was carried forward when the Bank became independent, although two changes were made at that time. Originally, the inflation target was defined in terms of the retail prices index. Thus, it gave greater weight to housing-rather an important difference. Secondly, the inflation target that I set up was accompanied by a requirement for the Bank to monitor different definitions of the growth in the money supply. This was later removed and the inflation target was much more narrowly defined to give less weight to housing and asset prices.
	Inflation targeting received quite a good press in general, although I took trouble to say that I did not believe that it was the end of monetary history. Indeed, before 2008 I went out of my way to say in various speeches that we were not paying enough attention to asset prices and the growth of credit, and that the Bank was concentrating on too narrow a definition of inflation. Therefore, in light of that and what subsequently happened, it is right that the Bank should be given a specific and enhanced stability objective. Of course, writing it down is one thing. As the noble Lord, Lord Myners, reminded us, Gordon Brown, as Chancellor of the Exchequer, talked a lot about stability and each year we saw a huge, glossy tome called the Financial Stability Report. Having stability as an objective is one thing; making it happen is another.
	I am not entirely convinced that the new, separate Financial Policy Committee is the best way to achieve financial stability. It might be better if macroprudential responsibility was handed to the existing MPC, which would then have a broader remit to stabilise the economy, not just consumer prices. After all, interest rates are an important tool for stabilising the economy. They are important for controlling leverage and the growth of credit. Other tools, such as how far the banks could use their buffers of capital and liquidity, could go to the MPC rather than the FPC. Other duties of the FPC, such as making the financial network safer, could be carried out by the Prudential Regulation Authority.
	Views on stability will often have implications for interest rates. Having two committees whose views might go in completely divergent directions does not seem the most obvious way to achieve stability. The fact that the governor sits on both committees, as has been referred to by several noble Lords, underlines the point. Only one committee can ultimately take the interest rate decision and some body at some point-not just the governor but the MPC-has to measure the trade-off and balance stability and the inflation objective. My noble friend Lord Lawson said that perhaps the three committees should become two. I would say a similar thing, although I would choose a different two from the two that he chose.
	I hope the fact that we are to have a separate Financial Policy Committee does not mean-this is one reason why I chose to go in the direction that I did-that we are going all the way back to the 1950s with more emphasis being laid on quantitative controls of credit. That would be a step backwards. Interest rates are the most flexible and the best way to control credit and leverage.
	In some ways, the Bill recognises the problem by laying down some extremely detailed provisions about how one regulator must consult another. Acres and acres of the Bill are about the PRA consulting the FPC, the FPC liaising with the PRA and one giving orders to the other. One could be forgiven for forgetting that they are meant to be parts of the same organisation. These provisions remind one of Burke's dictum that,
	"laws reach but a very little way".
	As the noble Lord, Lord Eatwell, said, regulation is not just about structure; it is about culture and judgment.
	Many noble Lords will remember that a previous deputy governor responsible for stability said in front of a Select Committee of the House of Commons that it was not his job to look at the accounts of financial institutions. I am not making a criticism of him. Of course, he was quite right. That was how the system was set up. But it shows how the macroprudential and the microprudential sides are intertwined.
	As several noble Lords have said, the Bill has great implications for the Court of Directors of the Bank of England, which will have to change. At the moment, the Court of Directors is what Bagehot would have called the dignified rather than the efficient part of the constitution. The directors are to be more involved in the stability objective than they are in the current inflation objective. Perhaps I may remind the House that the Bank of England's website currently says that the court's,
	"functions are to manage the Bank's affairs other than the formulation of monetary policy, which is the responsibility of the Monetary Policy Committee".
	We will now have quite a different stability objective relationship for the court. Clause 3, which will insert new Clause 9A into the Bank of England Act, states:
	"The court of directors must ... determine the Bank's strategy in relation to the Financial Stability Objective".
	As the noble Lord, Lord Turner, said, there is no symmetry between the relationship of the court to the inflation objective and the relationship of the court to the stability objective.
	It must be remembered that the Financial Policy Committee is exactly what its name suggests. It is a policy committee and not a regulatory committee. That has implications for where it should be accountable and to whom it should be responsible. Undoubtedly, the Bill requires the direct involvement of the Court of Directors, which will be in a way that has not been the case in the past. That will require very different sorts of persons to be directors of the Bank. If the Bill comes out as presently structured, it will require real banking and financial experts.
	The Joint Committee suggested that the court should be replaced with a supervisory board, which I am sure we will consider in Committee. The Bank needs to be accountable but it seems to me that it should be accountable in a different way for its regulatory activities. There must be an appeals procedure and it must be subject to regular scrutiny. Its policy work needs to be done by an independent bank, but to be accountable in a retrospective and periodic way to the House of Commons.
	One important aspect of the Bank's role will be representation in Europe, where the regulatory regime seems likely to alter very quickly. I assume that the PRA will represent the Bank at the European Union's banking and insurance authorities. Perhaps the Minister will confirm that the FCA will deal with the European Securities and Markets Authority. It is vitally important at this of all times that the Bank has heavyweight representation in the European Union. Many people outside are calling for the PRA to set up practitioner panels in the same way as the FCA will be required to do. That is a sensible recommendation, which I am sure will be discussed further in Committee.
	I support this Bill, subject to two qualifications. First, it must be emphasised that the Bill must have regard to international competitiveness. I know that the chief executive of the London Stock Exchange has suggested that that should be written into the Bill. Secondly, we must pay due and careful regard to the overall cost, because as well as the new twin peak system adding to costs, costs on financial institutions are already going up very quickly, not least due to contributing to the Financial Services Compensation Scheme. No one organisation has responsibility under the Bill for reviewing the cumulative impact of these costs.
	Subject to those provisions, I support the Bill and hope that we will never again see the paralysis and confusion that did so much harm in 2008.

Lord O'Donnell: My Lords, as this is my maiden speech, I would like to take the opportunity to thank all the Members of your Lordships' House, and all its officers and staff, for making me so welcome. I have had the privilege to serve and collaborate with many noble Lords on all sides of the House, not least our previous speakers, and I look forward to working with them again. As an ex-Cabinet Secretary and Permanent Secretary to the Treasury, I want to pay particular homage to my predecessors. Their advice has always been wise, their criticisms constructive and, thankfully, private. It was a particular privilege to work with the Prime Minister and Deputy Prime Minister as they took on the challenges of making the coalition work effectively, and I have been privileged to serve with other Prime Ministers. The strength of purpose of Sir John Major and Tony Blair over Northern Ireland; the decisive action of Gordon Brown at the London G20 summit during the financial crisis; and the coalition's actions to help the people of Libya-all these examples demonstrate one clear principle. Strong leadership can transform situations that look almost impossible. This is a message that I would like to get across to the leaders of the eurozone.
	I have been blessed with a highly supportive family. The O'Donnells have had an interesting journey from Roscommon in Ireland via the coal mines of Durham to the south-east of England, which explains my passion for improving social mobility. There are many other areas where I hope to contribute in this House, but today it is right to concentrate on economic and financial issues.
	As someone who was heavily involved in the five tests analysis on UK membership of the euro, published nine years ago, I will be observing very closely how the euro crisis unfolds. The nature of the resolution will have profound effects on our economy, and particularly our financial sector. No one can be sure what will emerge, which is why the changes proposed in the Bill need to be robust across a range of outcomes.
	Before I turn to my specific comments on the Bill, I need to register two interests, one actual and one potential. Having obtained the approval of the business appointments committee, I will be working as a strategic adviser to Ed Clark, the chief executive of Toronto-Dominion Bank in Canada. Mr Clark is one of the most respected bankers in the world, and the regulatory regime in Canada has enabled its banks to weather the financial storms remarkably well. Mr Carney is, interestingly, both governor and chair of its Financial Stability Board.
	There has also been press speculation that I may be a candidate to take over from Sir Mervyn King as Governor of the Bank of England. As I have already made clear, I will decide whether to compete for the job when it is advertised. However, I have already noted two issues from today's debate. First, the noble Lord, Lord Eatwell, has made it clear that whoever takes this job will be driven mad within a few short weeks. Secondly, I have realised that whatever experience I may have, the right reverend Prelate the Bishop of Durham has far more financial experience in trading.
	Coming back to the banks, Sir Mervyn has been a governor during a very stormy time for the world economy. He worked successfully with the Government to limit the damage of the global financial crisis and established the Monetary Policy Committee, which is envied in many parts of the world. His intellectual leadership has proved invaluable. In short, he will be a very hard act to follow. I have to plead guilty to the suggestion of the noble Lord, Lord Myners, that the governor and I had been collaborating on the tennis court. This is certainly true but it was very important from a policy point of view that we demonstrated to our US counterparts that fiscal/monetary co-ordination in the UK exceeded that in the US-and we won.
	It is fair to say that the financial crisis has inevitably exposed some weaknesses in our current structures, as it has for a very large number of countries around the world. I believe that it is right to give the Bank control over macroprudential regulation, but this is not without severe dangers for the Bank, the governor and the economy. The new arrangements concentrate a lot of power in the Bank. With power goes the need for accountability. The Treasury Select Committee, under Andrew Tyrie, has done an excellent job of holding the Bank to account. The Joint Committee has also done a good job of pre-legislative scrutiny. As a result, the Bill overall contains much that I strongly support. However, I believe that we should make one further change to the accountability structure. We should set up a new standing joint committee, under the chair of the Treasury Committee, to assess the effectiveness of the new arrangements once they are established. The new committee would combine the advantages of the democratic legitimacy of the Commons with the undoubted expertise that lies in this House, as we have already heard. In particular, it would look at how well the Bank's proposed oversight committee was operating. I agree very much with the right reverend Prelate the Bishop of Durham on that point.
	As a number of speakers have said, it is important not to lose sight of the overall objective, which is to enhance the well-being of the country by having a financial system that is both stable and supportive of the whole economy. This will inevitably involve judgments on how to balance the need to have enough capital to withstand shocks with the need to support British industry. As the noble Lord, Lord Turnbull, said, the Bank of England Act calls on the Bank to hit an inflation target but, subject to that, to support the Government's economic policy,
	"including its objectives for growth and employment".
	Similarly, I believe that the Financial Policy Committee should have the objective of financial stability but, subject to achieving that, it should be required to support sustainable growth and employment. A healthy financial sector that makes a fair contribution to the tax base, supports all sectors of the economy and has a sensible, more symmetric remuneration system would be a real asset to this country-we have a comparative advantage in this area-but never again should taxpayers pay for the consequences of failure when the rewards of success are concentrated in the hands of so few.
	There is one important imbalance that the Bill cannot correct: that is, the imbalance between the resources available to the financial sector, the Bank and the Treasury respectively. The Treasury is a brilliant department and I was proud to be its Permanent Secretary, but it is in danger of being swamped by the pressures placed upon it. As Sharon White's excellent report makes clear, the Treasury's turnover rate is far too high and its pay levels too low.
	It is in the interests of all of us that the Treasury is able to continue attracting the best and retaining their skills and experience. To avoid this being at the expense of the taxpayer, perhaps the part of the Treasury dealing with financial services and stability should be funded in the same way as the Bank and the FSA, namely by the financial industry which benefits from their work. Otherwise, the Treasury is in danger of cutting off its arms as well as its nose to make its hair shirt fit.
	Finally, can I urge the Government and all Members of this House to try to write legislation that will endure for the long term? We should not be fixated by today's problems, important as they are. We need a principles-based system that is not overprescriptive. It must allow the accountable individuals to have the freedom to tackle crises in what might be a very different and fast-changing environment. That is why we should concentrate on getting the objectives right and sorting out the accountabilities for those whose job it is to handle whatever this dynamic and volatile world throws at them. This Bill will have a profound impact on the well-being of our nation, and it has been an honour to be able to contribute to what has so far been an excellent debate.

Lord Bilimoria: My Lords, it is a privilege to follow noble Lord, Lord O'Donnell, and I am sure that I speak for all your Lordships in congratulating him on the most superb maiden speech. I have known Gus O'Donnell from the time he was Permanent Secretary to the Treasury, going back 10 years. I can honestly say that not only did I always like him as an individual but I never ceased to be impressed by him. After the Treasury, he was at No. 10 Downing Street, Cabinet Secretary, Head of the Home Civil Service, and Secretary to the Cabinet Office. In fact, he followed exactly in the same footsteps as our noble friend, the noble Lord, Lord Turnbull, who also went from being Permanent Secretary to the Treasury to holding those three positions at Downing Street. Now the jobs of the noble Lord, Lord O'Donnell, are being performed by three individuals. Let me emphasise that I am not saying that any of his successors are one-third the man that the noble Lord, Lord O'Donnell, is. He also had the distinction of serving three Prime Ministers-Tony Blair, Gordon Brown and David Cameron-in his six years at No. 10. Talk about high-flyers-you do not fly any higher than the noble Lord, Lord O'Donnell. No wonder people call him "GOD"-not just because of his initials but because of the huge respect that we all have for him. He has achieved all this as a youngster-he is still in his fifties; he has not even hit middle age yet. That will start when he turns 60 in October.
	The noble Lord was an Oxford Blue in football, and I think that by now he must be realising-football being a game of two halves-that our Chamber, unlike the other place, is not just about the Government and the Opposition; we have the added dimension of the Lords spiritual and the Cross-Benchers. We, the Cross-Benchers, are so proud and happy to have the noble Lord in our fold. He has already said that he could be in the running for the position of the next Governor of the Bank of England. Watch this space. We look forward to many more fabulous expert contributions from the noble Lord in the years to come.
	I have always said that one of the best things that Gordon Brown ever did was create the independent Monetary Policy Committee when he took over as Chancellor in 1997. It was able every month to set interest rates on an independent basis, proactively and reactively-and transparently. However, one of the worst things he did was create the tripartite arrangement of the Treasury, the Bank of England and the FSA. In the good times-the boom times-until 2007, this tripartite system was a happy merry-go-round. When we hit the crisis, this happy merry-go-round became a hopeless blame-go-round, and we realised that the tripartite system was not fit for purpose, as the Minister said. It was disastrous, and I am so happy to see that with this Bill, the buck will now stop firmly and squarely with the Governor of the Bank of England.
	We know that the Governor of the Bank of England, Eddie George, was extremely concerned when the tripartite system was set up, and he voiced his concern that the Bank of England was having its powers taken away and transferred to the FSA. We now know that this was the most foolish thing to have done. The FSA has the joint remit of financial services in the consumer market, protecting consumers and promoting competition, and was so focused on that consumer-facing aspect that its role of supervising and regulating the banks was ignored and neglected. Frankly, the FSA was out of its depth and ignored the most crucial aspect of its job. I could say that the FSA stood for "fairly sleepy agency". I remember taking part in debates in the House in the run-up to the Northern Rock nationalisation in 2008, four and a half years ago. I remember finding out at that point that the FSA had researched Northern Rock and in 2006 had marked it as "high impact" and as requiring close supervision. It also marked it for a review in three years' time. That was an organisation that was on top of things and wanted to act quickly, but of course it was all too late. By September 2007, Northern Rock was bust and £26 billion was required to bail it out-the largest amount required for any company in the world at that time. Of course, following the sub-prime crisis that led to the credit crunch, which led to the financial crisis, which led to the great recession, which led to the sovereign debt crisis, which has now led to the eurozone crisis, we now know that £26 billion is pocket money.
	I welcome many of the Bill's provisions but I am concerned that there is too much focus on the new bodies being created and on the theme of stability. No one would dispute the need for these bodies-and I congratulate the Government on introducing them-but I worry about the implication of leaving the Monetary Policy Committee pretty much as it is. No one could dispute the requirement for stability and prudence but, as many noble Lords have said, these must go hand in hand with growth in the economy.
	In the spring of 2008, when Northern Rock and Bear Stearns had already gone to the wall, seeing the writing on the wall the MPC sat idle. It was so obsessed with its inflation targeting and so afraid of having to write to the Chancellor that it kept interest rates at 5% for six months after the collapse of Bear Stearns. Instead of bringing them down straight away, it waited too long and then had to bring them down sharply from October 2008 onwards. We must change the myopic, blinkered approach that the MPC has been forced to take, focusing solely on inflation and not, as in America, and as the noble Lord, Lord Lamont, suggested, on maximising employment and, as my noble friend Lord O'Donnell said, looking at the overall state of the economy. Through this Bill, the Government must consider revising the MPC's mandate to ensure that it plays its part in securing recovery for the long term.
	Talking about new bodies, the FPC's mandate is seemingly pulled from the Hippocratic oath. Its mandate is to do no harm to the economy. It seems to have left out the rest of the oath, as there is no real mandate to cure the economy of the ills from which it may be suffering. I ask the Minister whether the mandate of the FPC-as well as the general system of financial and monetary regulation, including the MPC, which does not really seem to fall under the Bill at the moment-can be expanded to target growth and full employment and not just stability.
	The acid test of the Bill is: if this new structure had been in place five years ago, would it have prevented the scale and effect of the crisis that we had? Would it have been able to anticipate things-to hear the warning bells and react to them in time? Would it have been able proactively to see things coming? That is the test, and I should be interested to hear whether the Government have assessed that, even in a simulation exercise.
	When I chaired the UK India Business Council, of which I am president, I would boast to our counterparts in India about the wonderful light-touch regulation that we had in Britain. Of course, we now know that it was flawed. It is not about light touch; it is about the right touch. Do the Government really think that this new system strikes the right balance of regulation that this country so desperately needs?
	What about the structure of the Bank of England? Much power has been given to the Bank but, as has been said, cannot the court be restructured to have a more supervisory role, reporting directly to Parliament? Not enough non-executive directors are proposed. Can the Government say that they have the balance right on all the boards-the FPC, the PRA and the Court of the Bank of England-with enough non-executive directors? Are they going to be properly resourced in terms of access to information in order to perform their roles properly? Also, the MPC publishes information every single month and is very transparent. Will the FPC, the FCA and the PRA also publish regular reports in a transparent manner?
	I go back to the point that the MPC is neglected in the Bill. The only crossover seems to be the governor himself. I do not have too much of a problem with the buck stopping with the governor and with the governor having all these roles. However, I am worried about whether there is a mechanism for co-ordinating all these, which the noble Lord, Lord Myners, who is not in his place, spoke about. There could be conflict between boards. There are dual roles and there could be duplication. If there is a problem, things will fall between the cracks and we will go back to the old blame-go-round. This clarity of co-ordination where the cultures are concerned is not clear and we need to work on that in Committee.
	What about the powers of the PRA? It is important to get this figured out. It is focused too much on large institutions; but the Australian Prudential Regulation Authority implemented the whole of Basel II through guidance alone and shows how general guidance can sometimes be given. This whole area of guidance is completely missing in the Bill.
	To conclude, this Bill is wonderful news. We are actually putting power back into the hands of the Bank of England and I welcome that very much. However, I think that we are missing a key aspect-the role of the MPC and the co-ordination between the MPC and the FPC in making sure that the new structure is focused on achieving stability, preventing crises, generating maximum employment, generating low inflation and moderate interest rates, and, most importantly, on generating and sustaining growth in the economy.

Baroness Wheatcroft: My Lords, I shall begin, if I may, by congratulating my noble friend Lord O'Donnell on his masterful maiden speech. I hope that it is not the prospect of speedy abolition of this House that is making him contemplate another full-time job so quickly when he could be such a great asset to the work of this House.
	No one can doubt the need for change in the way in which we regulate financial services. Even if the euro had not imploded, the huge build-up of debt in the UK in recent times would have ensured that a messy denouement was inevitable. Regulation that was supposed to be light touch had become not only light touch but blind. The Bill should improve the way in which we regulate although we should never lose sight of the fact that regulation is only ever as effective as those who apply it. The regulatory structure, whether it be twin peaked, three peaked or, as my noble friend Lady Kramer suggested, an entire mountain range, is not as important as the quality and attitude of the regulators themselves.
	The structure of regulation set down in the Bill is already being implemented. The crucial point is that we are moving from a rules-based system to a judgment-based system of regulation. That has to be right. Judgment should have told any regulator that to allow a bank to lend 120% of value on a property to an individual on the basis of self-certified earnings would be potentially catastrophic, and so it proved. I applaud the general direction of the Bill and as a member of the pre-legislative scrutiny committee, which made many recommendations for amending the legislation, I am pleased that the Government accepted many of our suggestions. However, there are still areas where I believe there is scope for further improvement.
	I should declare that I am on the board of a regulated entity and hold a small-very small-shareholding in another.
	Much has been said about the governance of the Bank of England. The governor's role is no sinecure at the best of times but now with his-or perhaps, at some stage, her-powers and duties significantly enhanced under this legislation, it is indeed an onerous role. It has not always seemed that the court at the Bank provided any foil to that power and we have heard much along those lines today, not least from the noble Lord, Lord Myners, whose recollections of his time on the court do nothing to allay one's qualms. I must say that his recollection of the Mansion House dinner in 2007 leads me to believe that I must have been at a different Mansion House dinner in 2007 because, at the dinner I attended, the governor voiced great qualms about what was going on in the debt markets, particularly on the CDO front, and he talked of a real threat to global financial stability.
	Those qualms over the governance of the Bank exist. It has responded to some extent by establishing an oversight committee to review the work of the Bank and its committees and to summon outside assessment and advice. This is progress. While I am not overly concerned about whether the non-executive directors of the Bank are called a court or a statutory body, I feel that there is scope for them having increased accountability. Clearly, this is something that will be discussed at some length in Grand Committee. If the court is to have sufficient clout, there should be provision for the Government to consult the chairman of the court or the statutory board on the identity of the next governor.
	This brings me to the make-up of the Financial Policy Committee-a committee of the Bank. The Bill lays down that there will be only four truly external members on this vital committee. However, there is a strong case for having a majority of non-executives-and not just people with experience of the financial services sector. We want people there who know what is going on in the real world of manufacturing and construction. This is a crucial committee; we must get the membership right.
	The remit of the committee is, and has to be, very clearly to protect and enhance the stability of the financial system of the UK. Nothing should be allowed to detract from that. As the Minister pointed out, we do not want the stability of the morgue, and many noble Lords talked about the need for a growth objective. The Bill requires the FPC to have an eye on growth, but the wording is strangely negative. The FPC's responsibilities,
	"do not require or authorise the Committee to exercise its functions in a way that would in its opinion be likely to have a significant adverse effect on the capacity of the financial sector to contribute to the growth of the UK economy in the medium or long term".
	I suggest that we might be able to improve on that triumph of drafting. A secondary growth objective seems a logical thing to impose in the Bill. While never jeopardising the primary objective of the Financial Policy Committee, we must have regard to growth.
	We must look also at relationships between the Treasury and the Bank, which have been the focus of much attention. The Bill makes it clear that when the Bank tells the Chancellor that there is a financial crisis, the latter is in charge. However, as my noble friend Lord Lawson pointed out, there must be regular communication between the Chancellor and the governor. This should happen naturally in the course of events, but occasionally there might come a time when the odd psychological flaw gets in the way and communication will not work as effectively as we would like. This is another thing that the Grand Committee should look at.
	I turn to the quality of information. Noble Lords will recall that banks were decreed by auditors to be perfectly healthy-until it became apparent that they were not. The Joint Committee recommended that the PRA and the FCA should meet regularly with auditors to ensure that the dialogue would continue. We need to go further, and the Bill gives us the opportunity. My noble friend Lord Lawson of Blaby pointed out the need to recognise the flaws in bank accountability and accounts. The executive director of the Bank of England, Andrew Haldane, pointed to the problems with bank accounts and described getting an accurate view of them as like trying,
	"to pin the tail on a boisterous donkey".
	As we have seen, bank accounts are full of numbers that tell us nothing. It should be incumbent on auditors to spell out the risks that lie behind the numbers. This would enable regulators to monitor and limit risk-taking even more than they will do by their own efforts. Auditors need to shine a light on the risks that banks are taking rather than to obscure them.
	Finally, we must acknowledge, for the time being at least, that Europe will shape much of our financial regulation. We need to be clear that we have the right structures to properly liaise and influence such regulation. In particular, we need to hold on to the right to set our own minimum requirements on capital ratios rather than be put in a straitjacket by European minima.

Lord McFall of Alcluith: My Lords, I am delighted to participate in this debate and to welcome the noble Lord, Lord O'Donnell, to this Chamber. He is an individual with whom I have had many formal and informal dealings. He is a person of the highest integrity, respectful of every individual he meets, irrespective of status, and an exemplary model of a civil servant. It is a model that the Government should ensure they get more of in the years to come as the complexity of the financial services dawns on us. So I welcome the noble Lord, Lord O'Donnell, to this Chamber.
	I bring to your Lordships' attention my entry in the Register of Members' Interests. Like the noble Baroness, Lady Wheatcroft, I was delighted to be a member of the Joint Committee on the draft Financial Services Bill. A number of areas arose during that committee: first, architecture; secondly, complexity; thirdly, accountability; fourthly, ring-fencing; and, fifthly, and most importantly-a phrase to which we all signed up-that to be successful the reforms will have to change the regulatory culture and philosophy. Those should be the guiding principles.
	We all agreed that architecture is of secondary importance. The issues that matter are culture, conduct and communication. These issues were key to what went wrong with the tripartite authority. Alastair Darling's devastating evidence to the Joint Committee brought that out.
	On the issue of complexity, we should note that we are moving from a tripartite to a quadripartite system involving Her Majesty's Treasury, the Monetary Policy Committee, the Financial Policy Committee and the Prudential Regulation Authority, not to mention the Financial Conduct Authority. We have more interfaces, and therefore a higher degree of complexity. It was the interfaces and the information that fell down between them on the last occasion that caused the problem.
	The question that bedevilled the tripartite authority when it came before the then Treasury Committee in the House of Commons was very simple: who is in charge? Everyone said that they did their job properly. However, we had to face one of our biggest crises with a vacuum in the making and no clarity for the Chancellor. The Minister rather boldly said at the Dispatch Box that never again would we ask who was in charge. I suggest that those words could come back to haunt him in years to come if the Government do not get the correct legislation.
	As other noble Lords have said, at present we have opaque decision-making structures and still require clarity and explicit guidance and information, either through memorandums of understanding or whatever, on the view of the governor and his key deputies. We should remember that on many occasions the governor and his deputies will have contradictory views as a result of the responsibilities they are given and that the Chancellor must have clarity from them. There has to be no hiding place so that we can answer the question about who is in charge, but at present we cannot do that.
	I mentioned the issue of regulated culture and philosophy. Business models are the key to understanding the issues within a company, from the policies followed to the individual behaviour of the executives. Auditors are the key to this. A number of years ago I asked auditors what the point of an audit was. It is presently a backward look at accounts. Auditors are doing everything that is required but not much of what is expected. This was illustrated by Northern Rock. In the first six months of 2007, this small building society was responsible for 20 per cent of all new mortgages in the United Kingdom. The chair of the Audit Committee, and not least the auditors, should have asked why the company was doing so well compared to others. However, that question was not asked.
	Auditors therefore need to give a realistic view of the state of a company, taking into consideration the present and the possible future risks. I suggest that auditors should report to the Financial Policy Committee so that it understands both the microeconomic and the company landscape environments in an area of no more sensitivity than risk.
	At the moment, risk is a black box. This was illustrated in the comments made by Professor John Kay and Professor Charles Goodhart to the Treasury Committee a number of years ago. When asked whether we could evaluate risk, Professor Goodhart said very clearly, "No". Professor John Kay said, "I have been teaching at Oxford University for 25 years and I have ripped up my notes on risk". So risk is a black box, and more regulations and rules alone are not the way forward.
	We have to recognise that no regulator in the world spotted the problem. The Governor of the Bank of England said that the regulators were like locusts in Citibank. JPMorgan Chase is the latest example in the City, with the "London Whale" and a loss of £2 billion. Ten regulators were sitting in JPMorgan Chase when it happened. The question that arises out of that is: why did Jamie Dimon, someone supposedly alert and cute, need a call from Bloomberg to tell him that there was a £2 billion loss to his company? Jamie Dimon retorted by saying that it was a "tempest in a tea pot", but if you put your arm right next to a tea pot, you can get a really bad burn. Maybe he did not realise that.
	The situation of JPMorgan Chase and others reflects a systemic breakdown in management and risk control systems. Incidentally, the chief risk officer receives $14 million a year before foreign excises, so I would have thought that the risk officer could take quite a bit of a risk if $14 million is going into a current account as a result. I suggest that the Treasury Committee or other committees of the House should invite Jamie Dimon to explore the concept of risk and ask this question: are the largest banks still too big and complex to be managed safely? Are we now seeing "too big to fail" being followed by "too big to behave" in companies such as this one?
	The way forward lies in good corporate governance to tackle these deep-seated problems, not only changing the way people behave but the way they think. We need to promote values and a culture that drives people to do the right thing even when no one-that is, the regulator-is looking. Culture is behaviour and ethics is resolving conflicts of interest. That is what the Government should be promoting. The motto of the City of London is, "My word is my bond". In a recent survey, over 80% of people working in the City did not realise that. In other words, there is a big repair job to be done in order to restore trust.
	I am delighted to see that the departing chief executive of the Financial Services Authority devoted his last speech to culture. That is a small but positive step. If we focus more on these issues, we can hope eventually to realise a market system that is fair to both consumers and businesses, where risk is rewarded, failure punished, and growth and employment are paramount.

Baroness Noakes: My Lords, our rules say that, on behalf of the whole House, the noble Lord, Lord Bilimoria, should welcome the maiden speech of the noble Lord, Lord O'Donnell, but I hope that I may be permitted to add my congratulations on his forthright and interesting speech. I hope in particular that eurozone Ministers heeded his wise words on leadership. I should declare my interests as set out in the register of interests. I am a non-executive director of RBS and a shareholder in a number of financial services companies.
	My first point on this Bill is that it misses opportunities to ensure that UK plc is at the heart of financial services legislation. Bodies such as the CBI have pointed out that none of the new regulatory bodies is due to inherit the FSA's current requirement to,
	"have regard to the international character of capital markets and the desirability of maintaining the competitive position of the UK".
	The misguided reason given in another place is that this was associated with light-touch regulation and its disastrous consequences, but that is not good enough. Just as important, as other noble Lords have pointed out, is that the FPC's remit does not have an explicit requirement to have regard to growth in the UK. When I read the attempt made by my honourable friend the Financial Secretary to the Treasury to justify this in another place, I nearly lost the will to live.
	The financial services sector is a crucial part of the UK economy both directly in its contribution to GDP and tax yields and indirectly in its underpinning of the rest of the economy. It would be truly disastrous if the new bodies created by this Bill were merely technocratic and divorced from the needs of the wider economy. I hope that the UK's economic success will be hard-wired into this Bill and that we will avoid the stability of the graveyard.
	I cannot pretend to be enthusiastic about everything in this Bill. In particular, I believe that the twin-peaks approach may well create as many problems as it seeks to solve. That the FSA failed as a part of the tripartite arrangement is beyond doubt, but it is less than clear that the Bank of England would have made a better fist of prudential supervision before the financial crisis or that separating out conduct will be net positive.
	The FSA was expensively created in the late 1990s and now we are even more expensively creating new arrangements that will have different gaps and overlaps. I can sense the law of unintended consequences waiting to spring into action. My noble friend will be relieved to hear that I am not going to fight a rearguard action, and shall instead concentrate on other areas of the Bill where I believe improvements are required.
	I support the creation of the Financial Policy Committee to give focus to the Bank's financial stability objective, but the Bank and the Financial Policy Committee must operate in an accountable and transparent way. My noble friend has helpfully confirmed that the Government will make changes in the Bill as it goes through your Lordships' House, and I hope that this will go beyond the Bank's own suggestions. I hope that my noble friend will heed the wise words of several noble Lords on this topic, including the noble Lord, Lord Myners, and my noble friend Lord Lamont.
	I am sure that creating new macroprudential tools that will be available to the FPC can make a significant contribution to financial stability, but they are much too important to be created and operated in an accountability vacuum. As a minimum, the super-affirmative procedure will be necessary to give parliamentary oversight to their creation.
	If we are to have the twin peaks of the PRA and the FCA, they must be made to work together. I am concerned that the solution in Clause 5 rests on a memorandum of understanding, the very mechanism that demonstrably failed the tripartite authorities. My noble friend may already be aware that there is concern about the practical impact on regulated firms of the separation of the FSA into the two arms that will shadow the PRA and the FCA.
	There is no requirement in the Bill for the PRA and the FCA to consult on the creation of the memorandum of understanding; nor is there any parliamentary approval of the arrangements or provision for independent review of the effectiveness of co-ordination. This area of the Bill seems decidedly weak, and we need to strengthen it.
	The Government have usefully set out in the Bill the regulatory principles to be applied by the PRA and the FCA, including the rather elusive concept of proportionality. This is described in terms of burdens being proportionate to benefits-which sounds okay-but is then qualified by "in general terms", which of course begs a lot of questions. The London Stock Exchange believes that this needs to be explained in much more detail and that it should be calibrated both internationally and by reference to specific sectors. We need to look at the detail of this in Committee.
	The PRA will be charged with operating judgment-based supervision, which of course marks a radical departure from the last decade or so under the FSA. It is important that the PRA gets this right. I do not understand why the FCA will have a practitioner panel that it must consult but the PRA does not. The Joint Committee thought that this might lead to regulatory capture but wanted to see the PRA's approach to consultation laid out. We have now seen that approach and it has been described as "dismissive" by the British Bankers' Association and "insufficient" by London First. I am sure that we will need to look again at the way in which the Bill mandates consultation.
	I know that the FCA has a number of supporters, who see it as a consumer champion. But we must not forget that the FCA also has responsibility for wholesale markets and as the listing authority. It is the FCA that will have the UK's seat on the European Securities and Markets Authority. We will need to look carefully at the proposed membership of the FCA and its objectives to ensure that it will be properly focused on its whole range of responsibilities.
	The FCA will have many powers and responsibilities in relation to consumer protection, including product banning powers. We will need to scrutinise these carefully to ensure that they are proportionate and balanced and that they do not stifle product innovation, which could very easily happen.
	I would like to mention three final areas before concluding. First, I welcome the Treasury's new powers of direction. However, like the noble Lord, Lord Eatwell, and the chairman of the Treasury Select Committee in another place, I believe that those powers should be very considerably extended.
	The consumer credit responsibilities of the OFT are to be transferred to the FCA, which is a good idea in principle, but a number of practical issues have been raised by market participants, in particular the Finance and Leasing Association, and I hope that we will be able to deal with those in Committee.
	Finally, important clauses in Part 5 of this Bill lay the ground for independent inquiries. My test for these clauses is whether or not they would have made the Bank of England set up reviews of its own role in the financial crisis earlier and more comprehensively. I suspect that we need to amend Part 5 so that duties rather than powers are created.
	In conclusion, I hope that my noble friend will be receptive to the many improvements to this Bill that our debate today is showing to be necessary.

Syria
	 — 
	Statement

Lord Howell of Guildford: My Lords, with the leave of the House, I will repeat a Statement made earlier in the other place:
	"Mr Speaker, with permission I will make a statement on Syria. The whole House will be united in support for the Syrian people, who have endured 15 months of fear and suffering. Eighty-seven thousand people have fled to neighbouring countries and up to 500,000 are internally displaced. As many as 15,000 people may have died and thousands of political prisoners are imprisoned and at risk of mistreatment and torture.
	Each day reports emerge of savage crimes. The Syrian military is surrounding and bombarding towns with heavy weaponry, and then unleashing militia groups to terrorise and murder civilians in their homes. These deliberate military tactics are horrifyingly reminiscent of the Balkans in the 1990s.
	Two weeks ago in Houla, 108 civilians died in this manner, including 49 children under the age of 10. A similar atrocity appears to have been committed last week in al-Qubair, where 78 people were killed, including women and children. UN monitors attempting to report on these events have been shot at and obstructed.
	These grotesque crimes have illuminated to the world the nature of the events in Syria and the conduct of the Assad regime, which is attempting with utter inhumanity to sow terror, break the spirit of opposition in Syria and try to reassert control. This is as futile as it is morally reprehensible. By branding its opponents terrorists and using tanks against them, the regime is driving Syrians to take up arms to defend their homes; by singling out particular communities, it is inflaming sectarian tension.
	There are credible reports of human rights abuses and sectarian attacks by armed opposition fighters, which we also utterly condemn. We also have reason to believe that terrorist groups affiliated to al-Qaeda have committed attacks designed to exacerbate the violence, with serious implications for international security.
	As a result, today Syria is on the edge of civil war. This could lead to thousands more casualties, a humanitarian disaster, human rights violations on an even greater scale and instability in neighbouring countries.
	We are working intensively to find a peaceful means of resolving the crisis. Our approach, in close co-ordination with our European partners is, first, to push for implementation of the Annan plan as the internationally agreed road map to end the violence; secondly, to increase the pressure and isolation felt by the regime; and, thirdly, to ensure justice, accountability and humanitarian assistance for the Syrian people. I will take each of these in turn.
	First, the UN and Arab League envoy for Syria, Kofi Annan, has set out a six-point plan to end the violence and to start a political process to address the legitimate aspirations of the Syrian people. It is backed by two UN Security Council resolutions, 2042 and 2043. The latter mandated the deployment of the 300 UN monitors who are now on the ground in Syria. I pay tribute to them for their difficult work in dangerous circumstances.
	As Kofi Annan has made clear on many occasions, the onus is on the regime to call off its military assault, to adhere to a ceasefire and to allow a process of political reform. Political transition must be based on democratic principles and reflect the needs of all Syria's minority communities, including the Kurds, Christians and Alawites.
	On 1 April, the Syrian regime committed itself to implementing the Annan plan and on 12 April announced a ceasefire. It has not kept to either of these commitments. Two weeks ago, I discussed the situation with my Russian counterpart, Sergei Lavrov, in Moscow. I made the case for Russia using its crucial leverage with the Assad regime to ensure the full implementation of the Annan plan, since the collapse of Syria or descent into civil war would be against Russian interests as well as those of the wider world. I also raised the issue of arms sales to the Syrian regime, which we believe should be stopped immediately.
	In Istanbul on 1 June, I held talks with members of the Syrian National Council and other opposition representatives including Kurds, and I returned there last week for discussions with Secretary Clinton, the Turkish Foreign Minister and the Foreign Ministers of 12 European and Arab nations. I am in regular contact with Kofi Annan, and preparations are in hand for a meeting of the Friends of Syria group, which now numbers more than 80 countries, in early July.
	Last Thursday, the Russian Government put forward their own proposal for an international conference on Syria. Such a meeting could help generate momentum behind the Annan plan. However, it would have to be a meeting that led to a change on the ground and did not just buy time for the regime to kill more innocent people. In our view, any such meeting would need to be based on a common understanding that it would lead to a political transition; it should include genuine steps to implement the Annan plan; and it should involve only nations that are committed to being part of the solution in Syria. We will discuss with our partners whether it is possible to agree concerted international action on this basis, discussions which my right honourable friend the Prime Minister will take forward with other Heads of Government when he attends the G20 meeting in Mexico next week.
	Making a success of the Annan plan also requires the Syrian National Council and other opposition groups to put aside their differences, to unite around the common goal of a democratic transition and to assure all Syria's minorities that their rights will be protected in a multiethnic and democratic Syrian state. This has been my consistent message in all my discussions with opposition figures. We welcome the meetings with opposition groups that will be held in Istanbul later this week and subsequently in Cairo, which have our active support.
	The Annan plan is not an open-ended commitment. It cannot be used indefinitely by the regime to play for time. If the Annan plan is not implemented, we will argue for a new and robust UN Security Council resolution aimed at compelling the regime to meet its commitments under the plan, and requiring all parties to comply with it. We have already begun discussions at the Security Council on the elements of a resolution. We do not want to see the Annan plan fail but, if despite our best efforts it does not succeed, we would have to consider other options for resolving the crisis and, in our view, all options should then be on the table.
	Secondly, we are taking steps to increase the isolation of the Syrian regime. On 29 May we expelled three Syrian diplomats from London, including the chargé d'affaires, in co-ordination with the US, Canada, Australia, France, Germany and Japan and other countries that took similar steps. We are in discussions with Arab League and like-minded countries about measures to tighten the stranglehold on the regime's resources and external sources of support, building on the 15 rounds of EU sanctions that already target 128 individuals and 43 entities.
	Thirdly, we are acting to help end impunity for atrocities, and we are supporting the humanitarian needs and legitimate aspirations of the Syrian people. Britain co-sponsored the UN Human Rights Council resolution of 1 June, which was carried by 41 votes to three. It condemned the al-Houlah massacre, mandated the UN commission of inquiry to investigate and gather evidence about it, and highlighted the UN High Commissioner for Human Rights's recommendation that the UN Security Council refer Syria to the International Criminal Court. We are working on a further UN Human Rights Council resolution to reinforce these objectives.
	We also sent a team of British experts to Syria's borders in February and March to gather testimony from Syrians. The team found evidence of violations of international law and international human rights law, including murder, rape, torture, unlawful imprisonment, enforced disappearance and persecution. This work to document abuses is being continued. The team of Syrians which has helped document the al-Houlah massacre was trained by the United Kingdom, and we are working closely with the United States and the UN commission of inquiry to ensure that any evidence is collated and stored for use in a future legal process. We are increasing UK funding for the Syrian opposition and civil society groups, including £1.5 million of assistance in this financial year to help provide human rights monitoring and media training for activists, and other non-lethal support such as communications equipment.
	My right honourable friend the International Development Secretary and his department are working with the UN and international community to ensure that urgent humanitarian assistance gets to the 1 million people estimated to be in need. The Syrian regime has now agreed a plan to respond to humanitarian needs. There can be no further delay in its implementation, and humanitarian agencies must be allowed full and unhindered access to all areas in Syria. Britain has helped provide emergency food supplies for nearly 24,000 families inside Syria, safe drinking water for 30,000 people, blankets for 5,000 people, medical assistance for up to 25,000 people and support to refugees in neighbouring countries.
	The coming weeks must see an intensified and urgent international effort to stop the violence and restore hope to Syria. The British Government remain absolutely focused on this goal. If all the efforts that I have described fail, then Britain will work with the Friends of Syria group to increase the isolation of the regime and to adopt sweeping new sanctions across the world.
	We will not rule out any other option which could at any stage stop the bloodshed, We will not relent in our efforts to ensure the political transition, justice, accountability and security that the Syrian people need and deserve, and to support greater political and economic freedom in the Middle East. This freedom is not only the legitimate right of all the peoples of the region; it is the foundation of lasting peace, stability and prosperity.
	The time has long passed for the Assad regime to stop the killing and torturing of its people, and it is time now for all nations on the UN Security Council to insist on the cessation of violence and political process which remain the only peaceful way to resolve this mounting crisis".
	My Lords, that concludes the Statement.

Baroness Royall of Blaisdon: My Lords, I am grateful to the noble Lord, Lord Howell of Guildford, for repeating the Statement on Syria made earlier in the other place by the Foreign Secretary.
	If anyone was in doubt as to the seriousness of the situation in Syria, a simple examination of the facts should be enough to convince them of the scale of the horror that we are witnessing. The conflict in Syria has been raging for 15 months. The death toll is now estimated at more than 15,000. As the Minister has today told the House, two weeks ago, the village of al-Houlah was the scene of one of the worst reported massacres. United Nations observers on the ground have confirmed that at least 108 people were killed, including 49 children and 34 women. I join the Minister in praising the work of UN monitors in attempting to document those events. They have been repeatedly shot at and obstructed in trying to carry out that important task.
	This is not some historical conflict; it is unfolding in real time, documented on television screens and YouTube footage, so I welcome this opportunity to scrutinise the Government's response. Fifteen months on, instead of approaching its end, if anything, in recent weeks, the conflict seems to be entering a new and bloodier phase. The Assad regime continues to show utter contempt for the value of human life, perpetrating a violent and brutal crackdown on innocent people across Syria, for which the regime must ultimately be held to account
	However, expression of revulsion in response to that slaughter is not enough. Let us be candid and admit that the international community is dangerously divided in its response to the conflict and that division is drastically hampering the effort to stop the violence. The point of consensus for the time being is the Kofi Annan peace plan, but by any reckoning, the UN-backed plan has so far failed to bring an end to the violence. Do the Government think that increasing the number of monitors and boosting Mr Annan's resources would improve the prospects of that plan succeeding?
	To date, the Annan plan has been judged to be the only option on the table, but, as the Minister rightly said:
	"The Annan plan is not an open-ended commitment".
	What are the time limits and tests for the Annan plan? How much slaughter is required before the international community acknowledges that the plan has failed and begins to formulate an alternative means of ending the crisis? Of course, further diplomacy is needed if the divisions in the international community are to be overcome, but the difficulty of the task must not detract from its urgency. What is the Government's assessment of the recent judgment of the noble Lord, Lord Ashdown, who is in his place, our former high representative in Bosnia, who said of the Government's strategy for dealing with the crisis:
	"I don't think that is wise diplomacy"?
	As the Annan plan is currently not working, the challenge is to ask what beyond the Annan plan can be done, even accounting for the divergence of views in the international community. There are several steps short of military intervention that should be considered to sharpen the choice facing the Syrian regime.
	First, on the financing of the regime, without a comprehensive oil embargo in place, Syria is still able, in principle, to export oil to countries outside of the EU and US. What discussion has the Foreign Secretary had with the Government of India, who do not have bilateral sanctions in place and who have allegedly recently been approached by Syria to purchase Syrian oil? The Syrian regime is also still able to import diesel from countries such as Venezuela, which allows the regime to sustain its military operation, including tanks, through such foreign imports. What is the likelihood of a comprehensive oil ban being agreed at the UN and, failing that, what pressure have the Government put on countries considering trading with Syria in that way?
	Secondly, there is the security situation and support for the opposition. There are steps that, without breaching the arms embargo, could alter the realities on the ground, such as blocking the communications of Assad's forces and choking off his remaining finance by neighbours such as Lebanon enforcing the Arab League sanctions which they have previously agreed.
	The Syrian military is one the key pillars still sustaining the political regime in Syria and the newly appointed head of the SNC, Abdel Basset Sayda, was right to call for mass defections from the regime in one of his first statements since taking control. What is the Government's assessment of the present rate of such defections, and what steps can be taken by the international community to encourage and facilitate them further? Does the Minister agree that more should be done to publish internationally the names of any officers ordering atrocities as a clear signal of intent that they will face the full force of international justice for their crimes? The Minister mentioned al-Qaeda as operating in Syria. What is the British Government's view of the scale of that activity?
	I welcome the Foreign Secretary's recent visit to Russia. Can the Minister tell your Lordships' House whether he believes that the Russian position is likely to shift significantly in the immediate future as the situation deteriorates further? I welcome, too, the Government's comments on the Friends of Syria group and news that a further meeting of the group is planned. Alongside that group, how effective does the Minister think that an international conference on Syria-as has been suggested by Russia-would be, and does he share our concern that it may simply allow the regime to play for time?
	The Minister said that the Prime Minister intends to raise the issue of Syria at the G20 in Mexico. In the light of statements from a Chinese Minister earlier today that the situation in Syria should not be on the agenda at the G20, can the Minister give us the Government's assurance that they are taking all the necessary steps to ensure that appropriate time is found to discuss it?
	The Minister says in the Statement that if the Annan plan is not implemented, the UK Government will argue for a new and robust UN Security Council resolution aimed at compelling the regime to meet its commitments under the plan. How will the British Government endeavour to shift the view of Russia, in particular, to allow for agreement in the Security Council for the passing of such a resolution?
	The scale of the humanitarian crisis is growing by the day. The Foreign Secretary talked at the weekend of the British Government having committed £8.5 million to help alleviate the humanitarian situation. This morning, the Times newspaper reports that a group called the Union of Free Syrian Doctors is questioning that commitment and says that help for doctors trying to get medical supplies in through Turkey has come only from a one-off donation by France and from private individuals. Can the Minister use this opportunity to clarify that case? Finally, what thoughts have been given to creating large humanitarian enclaves for civilians-safe areas in countries such as Turkey or Jordan?
	All of us in the House have the same objective. We want the violence ended and the Syrian people free to decide their own future. In the 1990s, the world failed to act to prevent a genocide in Rwanda. The Foreign Secretary warned at the weekend that the bloodshed resembles that of Bosnia in the 1990s. Within weeks of the conflict starting in Bosnia, thousands of refugees were herded into concentration camps and suffered appallingly at the hands of the Bosnian Serbs. Those crimes were broadcast around the world at the time, just as the slaughter in Syria is being relayed on our screens today.
	In Bosnia, it took three years and the massacre of 8,000 people at Srebrenica before a bombing campaign led to a peace settlement. Despite the best efforts of Kofi Annan, no effective diplomatic response to this crisis has yet been agreed by the international community. After Rwanda and Bosnia, we said never again. The coming weeks and months will determine whether the international community meant it.

Lord Howell of Guildford: My Lords, I thank the noble Baroness for her support for the work of the UN and the broad thrust of what the nations, including this nation, are seeking to do, and for her candid and telling analysis of the grimness of the situation, on which she fully concurs with the Government.
	A great many of her questions touch on the position of Russia-I counted four or five-so I shall deal with those first and then her other questions. First, the key matter is: what can we do to reinforce or reassert the momentum of the Annan plan, which has clearly been ignored-disavowed, indeed-by various parties in Syria? The answer begins and ends with the question of Russia and, to some extent, China. It is the Russian position in, apparently, continuing to supply arms and the Russian and Chinese reluctance to see a UN Security Council resolution of the kind we wanted to go forward that prevents the council from bringing forward any such resolution and, no doubt, gives licence and encouragement to other countries such as Venezuela to carry on supplying and trading with Syria.
	As the noble Baroness knows, my right honourable friend went to Moscow. He talked to Sergei Lavrov. The idea now from the Russians is that there should be an international conference. The Statement which I read indicates that that might work, that might be worth taking forward, but we would have to have a very firm agenda and make sure that it was not just an excuse for a lot more talking and no further action while people continue to be murdered in hideous and evil ways.
	That is the assessment we have to put before our Russian friends and the Chinese. They are great and responsible nations in the community of nations and in the world civil order, and we believe that they should be brought to see that if there is a combined front, there is the possibility for much tougher action to close down the loopholes and routes by which arms and equipment are procured and oil is traded out and the stranglehold made increasingly effective. That is the broad answer to the whole question of what we should now do to invigorate the aims and aspirations of the Annan plan and the ideals behind it. It had six very clear aspirations, all of which in general terms are agreed, but they must be made to work and that requires action of the kind which many countries want but, apparently, not yet the Russians and the Chinese. That is where we have to work. The oil embargo could then be tightened up and there could be tougher moves on international communication.
	The noble Baroness asked about defections. There could be more encouragement there. It is obviously reassuring that senior people are moving across, abandoning the Assad operations, and we want to encourage more of that. Whether we could make the names of targeted individuals more widely known is something that we certainly would consider as we try to work out with our EU colleagues how tougher sanctions can be developed.
	The assessment of al-Qaeda involvement is difficult. Basically, one has to understand that al-Qaeda is interested in more violence and stirring up everything, regardless of size, causes, suffering or anything else. These are unrestrainedly evil people and they no doubt take some delight in the bottomless evil of the outrages of those human beings who can destroy and murder children in cold blood. We have no illusions about that. They may well be swarming around-swarming is too strong a word, but they may be present in numbers to involve themselves in and promote and exacerbate the position. We have no doubts that that is their motivation.
	I have mentioned the Russian position and the international conference. We will certainly seek to have Syria kept on the G20 agenda and the Prime Minister intends to raise it. Like the noble Baroness, I read the report this morning on the union of doctors. We were a bit surprised by it. It did not really tally with what we are seeking to do, both through the international agencies and global humanitarian aid, where we have made a substantial contribution, and through direct efforts.
	If I can be associated with the matter of enclaves, although the noble Baroness did not ask about them-she talked of humanitarian corridors-for them to work it requires organised force, troops and a political will that they should be allowed to operate. That political will is not there in Syria at the moment. The stage where we would have to talk about troops has not been reached. As my right honourable friend says, all options are on the table. However, as the noble Baroness recognises, there are steps that can now be taken to toughen up the sanctions, increase the stranglehold and, we hope, bring Russia and China into stronger co-operative action. That should be tried first and is what we are now working on. We hope-indeed, we insist-that more should now be done to put the pressure on the Assad regime and on all those who are in the killing business to halt their hideous destruction and pave the way for a better Syria.

Baroness Falkner of Margravine: My Lords, does my noble friend accept that while the Statement is extremely detailed and sets out where the Government believe they are, it is nevertheless a sign of the impotence of the international community that we have found ourselves in a position where the Russian Government have been able to propose an international conference in Syria which will undoubtedly push the situation into the long grass? That is not least because, as my noble friend repeated, the Statement says,
	"it should only involve nations that are committed to being part of the solution in Syria".
	When we have Russia, Saudi Arabia and Qatar, which have all been on different sides of the argument, arming combatants in the regions, it is hardly likely that they would be able to achieve a consensus behind the Annan plan or, particularly, to protect the rights of minorities in the region. Will my noble friend tell the House what we will do when that open-ended commitment to the Annan plan is dropped and what steps might we take? Would we then look to our own duties under the norms of responsibility to protect?

Lord Howell of Guildford: I understand my noble friend's feelings, which are largely mine, that the Annan plan is not working and has to be reinforced. We think that is the pathway forward and that the principles behind it are right, but clearly the killing and the horror continue on a totally unacceptable, impossible and outrageous scale, so something more must now be tried. When my noble friend talks about nations not being committed, she should bear in mind that the one uncommitted nation actively promoting the arming of the Syrian regime is Iran. The Iranians are the ones who should not be included in any further conference, although it has been suggested by some that they are clearly actively opposed to any kind of path towards peace and settlement. That is what that phrase is really aimed at; that Iran is on the side of violence, and more violence.
	I do not necessarily share my noble friend's view that the talks with Russia and with the Chinese are never going to work and that there will never be some understanding that this cannot go on and that there must be a united effort to close up the loopholes and stop the arms supplies by the really big powers, such as Russia and so on. I do not share her view that this is an impossible aim. I do not say that we have got there but this has to be worked on, combined with all the other sanctions and proposals that we are now committed to, to end the violence and repression.

The Lord Bishop of London: My Lords, everyone will recognise that Her Majesty's Government are dealing with a tragic and complex situation. Again and again in the Statement that the Minister repeated, the rights of minorities were drawn attention to. Have Her Majesty's Government been able to make direct contact with the substantial Christian minority, who are 10% of the population of Syria and whose influence on the Russian Government is not inconsiderable? There is certainly direct contact between the Christian minority and the Russians. If there is, as the Minister underlined, an absolute commitment to defusing the fears of the minority communities in Syria, which must be part of any kind of moving forward, have Her Majesty's Government been able to use the channels of communication that exist with the various Christian communities that make up that 10% minority in Syria?

Lord Howell of Guildford: The right reverend Prelate is absolutely right that the Christian position is important. All along, we have heard suggestions that while the Christians may find repulsive what the Assad regime is doing, they also fear alternative regimes. Instability might jeopardise their position even further, so they are definitely an important part in the jigsaw of possible pressures in the future. I think that is as much as I can say.
	As far as direct contact is concerned, I am not in a position to say exactly what contacts HMG have had with the Christian minorities. We have encouraged all of the Syrian opposition groups to reach out to minority communities and maintain a clear commitment to a peaceful, non-sectarian approach. We have insisted that they reassure all Syrians that they are working towards a Syrian state which is inclusive, representative and respectful of the ethnic and religious minorities. That is the line we have consistently taken but I cannot really promise that it will be an absolutely guaranteed condition in a situation where bloodshed, hatred and violence are prevailing on all sides. However, it is a matter very much in our minds. Another part of the jigsaw, which the right reverend Prelate rightly raises, is that the Christians in turn could have some kind of contact and dialogue with the Russians to persuade them that the situation requires a more unified approach. That is a possibility but I do not think I can put any more flesh on these ideas at the moment.

Lord Gilbert: While I agree entirely with the Minister that Iran forms an important part of this problem, I disagree with him entirely that that is a reason for it not to be at a conference. I thought there was every reason for the Iranians to be at a conference to let them hear what other people think of their attitude and behaviour, and to make it clear to them that it is in their best interests to get the situation solved and stop supplying arms to the Syrian Government if they are doing so. It seems to me that the Government's logic is upside down on this.

Lord Howell of Guildford: Well, my Lords, I am not sure that I agree with the noble Lord. His views are usually very challenging and make one see things a different way, but in this case he is asking for the inclusion of a power that is actively concerned to delay and screw up-if I may use the vernacular-conferences and talks and to promote violence and is continuing to supply arms direct to the Syrian regime. It does not seem as if that would be a very good voice to have at the table at a time when we are trying to persuade other nations, such as our Russian friends, to realise the vital need for a unified approach to close off the loopholes. I understand the psychology of what he is saying-that perhaps it could work the other way around-but the best guess for the moment must be that to have the Iranians at the table and welcomed at any new conference would be a guarantee that it would produce nothing whatever.

Lord Wright of Richmond: My Lords, in the debate in this House on 16 March, I asked the Minister if he could give us the Government's assessment of the assistance in terms of finance, arms and "foreign fighters" being given to the opposition in Syria. I do not know whether he is able to answer that question now, but I note that the frequent reports of assistance being given to the opposition in this area in terms of finance, men and other assistance have not been denied in the Gulf. I think that it is now accepted, certainly in the Middle East, that Saudi Arabia and Qatar have arranged between them for a massive supply of military assistance to the opposition in Syria, not with the aim of, to quote the Statement, stopping the violence and restoring hope to Syria but rather in order to replace the Shia secular regime in Damascus with an extremist Sunni regime enjoying the support, ironically, of al-Qaeda. Coincidentally, the "Today" programme this morning reported that the casualties of the regime's forces in the past few days have outnumbered those of the opposition-a reminder, surely, that we should not immediately put all the blame for the terrible things happening in Syria on the Syrian regime.
	Syria is being plunged into a secular war, with potentially disastrous consequences for the security of the Middle East and, incidentally, for the future of the Christian community to which the right reverend Prelate referred. I hope that the Minister can assure the House that the Government will not only resist the understandable pressure to intervene ourselves but do all in our power to discourage any further military intervention by our friends and allies and continue to do everything we can to support Kofi Annan's mission, however unpromising its prospects.

Lord Howell of Guildford: The noble Lord's presentation of, if not the immediacy then certainly the possibility of, this being a religious regional civil war between Sunni and Shia is perfectly valid. That is what it could become and perhaps in some aspects, although the situation is very complicated, is becoming already. That may well be part of the picture that he also describes of arms going to the Syrian opposition forces, though whether in massive quantities or not I do not know-I cannot give him precise figures. We do not know to what extent Saudi Arabia and Qatar, whose leaders have talked about the need for arms, are actually supplying them and whether they are doing so officially or whether it is being done by various other channels. We simply have not the means to know. We know that some arms are getting through, though whether they could be described as massive I could not corroborate. That is how the situation is developing.
	My right honourable friend's Statement made clear that not all the grim violence has been on one side. He rightly condemns any manifestations of similar horrors and outrages by the opposition. Whether or not this is a civil war between the religions in the region, this is rapidly becoming, as my right honourable friend has said, a civil war within Syria, and I am afraid that it is a matter of history that it is sometimes in civil wars that the worst atrocities of man against man and man against woman are exercised. That, I am afraid, is unfolding before our eyes. So it is correct that not all the blame is on one side. That it could become a gigantic Sunni and Shia war within Islam is a possibility; it is one of the concerns underlying our attempts to put out this monstrous consuming fire before it devours many other people in neighbouring regions.
	As for the details of what arms are being passed, it is very hard to track down how many arms are going from Russia to Syria, and there was mention of Venezuela possibly supplying arms as well. Then there is what Iran is doing; we know that it is pouring arms in on the regime's side. On the other side, there are arms going to the opposition. These are difficult things to pin down in a very confused situation.

Lord Inglewood: Do the Government believe that the militias that are carrying out these murderous activities are under the ostensible control of those under whose metaphorical banner they are marching?

Lord Howell of Guildford: My right honourable friend made a comparison with the horrors in Bosnia at the end of the previous century, when militias claiming to be acting in the name of one side or another may or may not have been condoned or even have been instructed by the authorities. To answer my noble friend's question, that comparison reflects on the assessment that we have to make of the present situation. It is hard to tell how much these murderous attacks-village against village, region against region-are, at the very lowest level, simply the settling of old scores or, at a higher level, people who are inspired by one side or another to think that they can put a label on themselves and go and murder everyone in sight. Perhaps, at the highest level of all, they are actively receiving orders and encouragement from the Syrian regime. Those are all possible, and there is evidence that at all levels there are those sorts of motivations. However, you cannot distinguish and draw lines in all these cases; you cannot say that all these horrors and the revolting, outrageous and evil killing of children are ordered from the centre. If they were, that would reinforce everything that we fear about the nature of the regime, but I do not think that that is the case in every instance; there are probably other evil motives at work as well.

Lord Anderson of Swansea: My Lords, at a time of the cooling of the right to protect and humanitarian intervention, I was puzzled by one word in the Statement. It was the word "compelling" in this passage:
	"we will argue for a new and robust UN Security Council resolution aimed at compelling the regime".
	Given the Russian and Chinese position, surely there is no prospect of such a resolution. If these are not just empty words, that could mean only military intervention outside the UN framework, which is most unlikely to happen. Who would lead that? There was talk this morning about drones targeting or showing the way for the targeting of opposition areas. Do the Government know who provides and controls these drones?
	Amid all the horror, there is increasing concern about the way in which a likely Sunni-dominated successor regime would deal with minorities. Do the Government share this concern, especially with regard to, as the right reverend Prelate has mentioned, the Christian minority within Syria and the many refugees from Iraq who are there? If so, what are the Government doing to ensure that as far as possible there will not be a regime that persecutes minorities, as other Sunni-led regimes in the area do?

Lord Howell of Guildford: On the last point, I addressed that very point when it was raised by the right reverend Prelate. The position of the Christian minorities is of great concern. To answer the question about what the Government are doing, as I said earlier, my right honourable friend, officials and representatives of HMG have constantly urged the Syrian opposition to extend tolerance and a full place to ethnic and religious minorities, and that embraces Christian minorities. That is what we are doing.
	As to the word "compelling", the noble Lord is very skilled and active in these areas, but I think he is slightly misreading its meaning. I go back to my earlier point that with the full co-operation of the Russians and the Chinese-if we could get it, which at present does not look very promising, but great efforts are being made-there would be a compelling and effective stranglehold. It is possible to switch off a society and to close down a regime altogether and make further governance impossible by cutting off basic utilities, power and all ingoing and outgoing supplies, but that is impossible as long as these two great nations, Russia and China, and a few others, are carrying on with trade and supplying equipment and arms. It is not realistic to imagine that without Russia and China we would resort to arms. That is pointless. It is a dead end. Russian and Chinese co-operation are essential for the stranglehold to work, and that has got to be the path of compulsion that we go to before we come to even grimmer possibilities. However, as my right honourable friend repeated, all options are on the table. There are steps ahead that we can take and which we will take, and we will work night and day to hold dialogue with Moscow and Beijing because they have a vital role in this process.
	I cannot comment on drones. I will not comment on intelligence aspects, but if I have any more knowledge, I will gladly write to the noble Lord; at the moment, I have none.

Lord Ashdown of Norton-sub-Hamdon: Following my noble friend's answer, surely the difference between this and Bosnia is that in Bosnia we could act but chose not to, whereas in Syria we would like to act but cannot because we cannot get agreement from the Security Council. Surely the lessons that we should have learnt from Libya are that getting agreement from the Security Council and, above all, making sure that the Russians and the Chinese do not exercise their veto are far better served by letting the coalition of local voices lead the call for action and that we should concentrate on humanitarian action, not regime change. So why have we abandoned them? Why have we reverted to the prospect that the West leads the charge and is seeking the removal of the one person, the one friend, Russia has by seeking regime change up front? Has that not made it easier for the Russians and the Chinese to cast their veto? Is the consequence of that not that we now find ourselves in an impasse which is in part because of rather unwise diplomacy, which will not only lead to greater bloodshed in Syria but to the even more baleful prospect of a widening Sunni-Shia conflict throughout the whole of the Middle East?

Lord Howell of Guildford: I listened very closely to the noble Lord who has enormous expertise, certainly on the Bosnian scene, but I do not think we have abandoned the idea that the regional powers-the Arab League and Turkey and other responsible powers in the region-should be right up in the front and leading the pressure. This is not just a western story; this is a story where the global order is looking with horror at what is happening. Responsible nations are actively helping. We are arguing with Russia and China, which we hope will become fully responsible nations-they should act as responsible nations, as they are great powers-in the same vein and on the same path. That is what we are trying to do. I do not think there is another path of diplomacy that somehow would magically put certain regional powers in a forward position, and I do not think this is seen just as a western show. That was last century stuff; today, no one moves in international affairs, as my noble friend knows perfectly well, without full consultation with the African Union and the Arab League and increasingly with Beijing and Moscow, which play crucial parts, and with many other countries as well. This is not the century of the West; this is the century of Asia and Africa and the new international and multinational organisations which are reinforcing the ones we inherited from the 20th century. So I do not accept my noble friend's analysis, but the wisdom behind his thought is correct.

Financial Services Bill
	 — 
	Second Reading (Continued)

Lord Whitty: My Lords, I want to approach this Bill in a slightly different way. Although I no longer have any formal role in the consumer world, I want to look at the Bill from the point of the view of the average consumer of banking and other financial services and of the microbusinesses that have to deal with our financial institutions. They are faced with a very powerful and often quite incomprehensible financial system and a fairly incomprehensible system of regulation. I am not sure that this Bill will help them or, indeed, many practitioners in this field. The Bill is not only, as my noble friend Lord Eatwell said, slightly messy in its presentation, for all the pre-legislative efforts, but the way that it is drafted makes it difficult to follow, and it also excludes substantial parts of the jigsaw. The Minister referred to the Vickers report, the forthcoming White Paper and a separate banking Bill, and in another part of the jungle we have a change in the competition regime and changes in EU financial regulation, all which need to be taken into account before anybody can form an overall position about whether this new regime replaces the old regime in a way that is beneficial to the consumer.
	It is clear that there were serious failures in the 1997 tripartite structure. It is also pretty clear that there were serious failures in the pre-1997 structure that concentrated powers in the Bank of England and the Governor of the Bank of England. We need to look to see whether this third attempt is any better. Many of us would conclude that the problem was not so much the institutional structure as the nature of the regulation. I would say it was too light touch-the noble Lord, Lord Bilimoria, would say it was too wrong touch-and I am not sure that the current structure makes it much better.
	I, slightly surprisingly, find myself on the same page as the noble Baroness, Lady Noakes, on this one. The separation of the FSA into two distinct parts does not necessarily commend itself to me. Of course, there are those like the noble Lord, Lord Lawson, who will say that consumer protection got in the way of proper prudential supervision; there are also some on the consumer side who would say that the FSA was overburdened and failed in its consumer protection, partly because it had multiple functions. Total separation, which this Bill appears to create, seems unfortunate. After all, if you look at Northern Rock, it failed on its own corporate microprudential side and, indeed, made a major contribution to the failure on the macroprudential side because it was selling inappropriate products to the wrong consumers. In other words, in that case the consumer interface was important in the prudential sense in the total running of the monetary system, as it was in the United States with those who advanced subprime loans and so forth. Separating them totally is dubious. However, like the noble Baroness, I think I will be flogging a dead horse on this one if I pursue that in Committee. After all, the previous Government also proposed separating them, and I think I had better concentrate on what I would regard as a slightly second-best solution; namely, that the Bank of England and the PRA should also have some regard to consumer considerations and that there should be more effective co-operation between the PRA and the FCA and between the Bank of England and the FCA in relation to consumer issues and consumer issues implications through the broader supervisory role. That could be in a memorandum of understanding, but since the previous memorandum of understanding did not really work, as several noble Lords who have great experience of these matters have said, I would prefer to see it in primary legislation. It is certainly something that we should return to in Committee.
	Turning to other consumer issues, why are we not writing a consumer mandate throughout the Bill? Where are the enhanced consumer powers? I welcome the additional powers for the regulator with regard to such things as products-I recognise that there are restraints on those-but where are the powers for the consumers themselves? Under Alistair Darling, the previous Government proposed, for example, at least a limited form of collective redress in financial matters. That would greatly simplify the current mess over PPI. Whether such a system of collective redress would be opt-in or opt-out is a secondary consideration. However, that additional direct power for consumers or consumer organisations appears nowhere in the Bill.
	I have other concerns. One consumer concern in particular relates to privacy. The nature of the banking sector is changing. Organisations that are not banking organisations are setting up banks or quasi-banks. We heard about Marks & Spencer just this morning. There is protection for the privacy of data for the consumer of one subsidiary of a bank; the parent company cannot use that information in a different context. However, no such provision seems to apply to supermarkets. They already have a huge amount of data on their customers, which they could use to customers' detriment were they to pass them to their financial wing-Tesco bank or M & S bank, or whatever we will call it. That is a loophole that we need to address.
	There are also issues in relation to the competition structure. When, under the previous Government in 2008, this House approved the takeover of HBOS by Lloyds TSB and the nationalisation of RBS, I argued that we had to agree to it, given the emergency, but that in 18 months' time there should be a full Competition Commission investigation into the structure of retail banking. However, if anything, the situation has got worse since then. I hope that the fact that the OFT has powers in relation to CCA issues does not mean that we end up with yet another sectoral regulator of everything in financial services that has competition well down its list of considerations. After all, some other sectoral regulators, such as those for energy and water, are adamantly opposed to any reference to the Competition Commission because they see it as a failure on their part. We need to avoid that.
	I make a brief point on governance-not so much governance of the Bank of England as of all banks. Banks are unique companies. The rules that apply to joint-stock companies and other bodies generally are not really appropriate for banks. We must all recognise that if we do not change the responsibilities of the boards of banks and those who sit on them, we will go through a similar crisis again. At some point, in the course of either this Bill or the banking Bill, we should address that issue.
	Finally, I agree wholeheartedly with the right reverend Prelate the Bishop of Durham, who made a very effective speech. We have a two-tier financial market in this country. Around 20% of our population do not have access to banking facilities, credit or insurance in the way that most of us do. On the credit side, many are driven to those who offer loans at a rate of around 1,000% APR and often, as the right reverend Prelate said, into the arms of criminals. Unless we not only intervene in that market under the new regulatory structure but impose on the mainstream banks and credit creators some responsibility for universal provision, I am afraid that the two-tier financial market, financial exclusion and the whole system-of which payday loans are but one example-of division within our society will persist. I hope that somewhere within the Bill and this structure we can address that issue as well.

Lord Mawson: My Lords, I will focus my remarks in this Second Reading debate on the opportunities for growth and investment in the East End of London, particularly in the Lower Lea Valley, where there is a real investment opportunity. When I first arrived in the East End, nearly 30 years ago, the Isle of Dogs was a wasteland. The local joke was that there were two buses a day to the island. At that time the financial centre at Canary Wharf did not exist. The culture of the public and voluntary sectors was anti-business, a dependency culture was rife, and it is fair to say that the councils running the surrounding London boroughs of Newham, Tower Hamlets and Hackney were mostly basket cases.
	Over the past 30 years, major changes have taken place and east London has been transformed. Because of the focused leadership of the noble Lord, Lord Heseltine, and others, a phoenix is rising from the ashes. East London is once again becoming a global destination and a centre of enterprise, innovation, finance and business. It is increasingly recognised as a powerful engine of the British economy, as it was for several hundred years previously, before the demise of the docks. Many years ago, after the closure of the docks, the noble Lord, Lord Heseltine, began what many of us working on the ground have come to understand as a 50-year regeneration journey. As we prepare for the Olympics in six weeks' time, we are half way through that journey. The opportunity to present the scale of business investment in the valley to the world, through this global event, is great.
	However, do central and London government truly understand the importance and scale of this wider investment narrative around the Olympic site? Recent meetings that I have had with the key people responsible for articulating this story to more than 20,000 journalists, who are soon to arrive, have not filled me with confidence. They are not familiar with east London or its history and are struggling to develop a clear and concise story. We get one shot at selling east London to the world and we must not miss this investment opportunity. This matter is urgent.
	Nearly 16 years ago, three of us met just a few hundred yards from the Olympic stadium. We began to dream about the Olympics coming to east London and to explore its potential added value. The instigator of the meeting was the indefatigable champion of a London Olympics bid, Richard Sumray. At that first meeting, we realised that if the Olympics were ever to come to London, the only place with enough land was the Lower Lea Valley-a forgotten corner of the city on our doorstep. Historically, this was the home of some of the country's greatest innovators and entrepreneurs. Michael Faraday carried out his electrical experiments at Trinity Buoy Wharf, opposite the Dome. Isambard Brunel built his ship SS "Great Britain" there. The world's first biotechnology process was developed at the Clock Mill in Bromley-by-Bow.
	The Games provided us with a fantastic opportunity to give the world a new perspective on the Lower Lea Valley-a story of business, investment and the growth of an enterprise culture. The Olympics would be a catalyst that allowed us to reach out to investors across the world. They would connect the financial centre then emerging at Canary Wharf with other key development nodes in Greenwich, Canning Town and Stratford in the north. At that time, I reminded my colleagues that the late Reg Ward, who was the life force behind the Canary Wharf development, had always described east London as a water city. Fly into City Airport, look down, and you will see exactly what he meant. East London is surrounded by many miles of docks and waterways. We reminded ourselves that water had driven the economy in east London for 200 years. If the Olympics ever arrived, we needed a vision with integrity that we could communicate. We needed a simple story to draw in potential investment partners from across the world.
	After this initial meeting, two of us went to see the noble Lord, Lord Rogers of Riverside, just to check that we were not coming off our trolleys. Within minutes, he agreed that water was the key to both the Games and future investment in the valley. Together, we wrote what must be one of the first documents to position the site for the Games at the heart of the valley and link it to the investment and development nodes that we saw emerging there. This document shows an emerging city in east London, growing around the waterways, ripe for investment and growth, and with the necessary infrastructure coming into place. It also champions new ways of growing enterprising communities with local residents by connecting them to this emerging business and enterprise culture. I still have the booklet today and the present buildings on the Olympic park are not far from what we imagined then.
	We sit here 16 years on and we have seen a variety of people and organisations join the Olympic bandwagon. My colleagues and I do not claim all the credit for starting it moving, but we played an important small role as a catalyst beginning to connect the financial service industry at Canary Wharf to the growth potential that now surrounds it.
	As chairman of the All-Party Parliamentary Group on Urban Regeneration, Sport and Culture, it has been a privilege in recent years to take many colleagues from your Lordships' House and the other place by boat up the waterways of the Lower Lea Valley so that they might see the bigger picture around the Olympic site. The Olympics, although important, is not the biggest show in town in east London but it is a fantastic catalyst that can drive investment in the area and join the dots of development. Development nodes are well advanced in Greenwich around the O2, at the expanding City Airport, the growing international conference centre at ExCel, the global business district at Canary Wharf, the £3.7 billion of investment taking place in Canning Town and the £1 billion housing and regeneration scheme further north in Poplar that my colleagues and I are involved with. Here, I must declare an interest.
	At the new Westfield shopping centre across the River Lea, we witnessed 1 million shoppers in the first week of opening and a new international station waiting for Eurostar to stop at its prepared platform. Today, with UCL relocating to Stratford, a life sciences-focused enterprise zone in the Royal Docks, the European Medicines Agency at Canary Wharf, and the Tech City concept at Old Street, the area is rapidly developing as a UK science and technology hub. As well as that, right there, there is also the Queen Elizabeth Olympic Park that will hold five new villages and a commercial district. Here, I must declare another interest as a director of what is now called the London Legacy Development Corporation.
	Noble Lords are probably asking what all this has to do with the Financial Services Bill. I am no expert on the intricacies of financial regulation. I will judge the legislation by effect. But I know that all the above would not have been possible without individual entrepreneurs being able to take a calculated risk and back a promising idea. It was risk that made the docks the trading capital that they once were and that turned around the fortunes of the Lower Lea Valley once more. While not encouraging bankers to raise their heads recklessly above the parapets, I would remind them that the financial story of our nation would have been somewhat different if the Faradays, Brunels, and Heseltines had not dared to take appropriate risk. We did not build significant trading links across the world from east London by battening down the hatches and lowering the anchor.
	While a stable, better regulated financial sector is an obvious benefit for all those involved in business and enterprise, my concern is whether an excessive focus on financial stability will prohibit banks and others taking calculated risks and backing potential growth. Over the coming years, in east London and across our country, I look forward to seeing small and large businesses being able to raise the capital that they need, local families taking out mortgages that they can repay, and entrepreneurs opening bank accounts with ease. At the moment, the bureaucracy surrounding these processes makes me think that it is easier to return to keeping the money under the bed.
	It seems to me that the new Financial Policy Committee will set the tone for the financial sector. Although the FPC has a financial stability objective, the Bill prohibits it from doing anything to seriously prevent growth. But in the interests of long-term, sustainable growth, should there not be a strengthening of this provision? I believe that a secondary objective for the FPC should be created so that it can support the Government's economic objectives and support growth positively.
	Secondly, where is the human dimension to this legislation? My experience in other fields causes me to worry that the macro financial deals made in the lofty towers of Canary Wharf and the City may not be well connected with the micro realities on the ground at the foot of the towers or with the small businesses and practical day-to-day realities of earning a crust. I would remind the House that the City, whose wealth came through the docks in east London, started with coffee houses where people met each other and did deals. This world was about relationships and integrity-"my word is my bond". You can create endless regulation and legislation but if people do not act with integrity and relate to each other it will not work.
	Much has been done to encourage Canary Wharf and the City to deepen their ties with local and surrounding businesses. The Queen Elizabeth Olympic Park and the companies based at Canary Wharf are beginning to realise the long-term advantages of deepening relationships with local business and enterprise. While large organisations cannot be expected to connect with individual entrepreneurs, it is important for them to find a middle ground and to support successful businesses and enterprises which, in turn, will positively impact upon and attract individual entrepreneurs.
	My experience is that being in a strong relationship with the world around you, rather than being isolated in ivory towers, is what keeps you safe and honest. If banks had focused on maintaining closer working relationships with their communities, many of our current difficulties could have been prevented. With this in mind, might it not be sensible to have a fifth external member join the FPC who positively engages with small business and has hands-on practical experience in the field? The micro and the macro need to be connected to generate success.
	The questions we have to ask today are: will this legislation add to the isolation of the financial services industry or will it help further relationships with enterprise and business? The Bank of England needs to be concerned with more than financial stability. It needs to be concerned with issues central to business and enterprise growth, to have practical and pragmatic objectives, and to have a desire to provide assistance where needed. Theory is one thing but practice is quite another.

Lord Tugendhat: My Lords, I will not follow the noble Lord, Lord Mawson, down the Lea Valley but I should like to revert to the causes of the troubles in 2008, for which I think there were two main reasons. First, by far the most important was the belief in light-touch regulation, to which both main parties, the financial community, most economists and commentators, and I at that time, subscribed. To this was linked the near universal view in this country that the lighter the touch, the greater London's competitive advantage.
	The second reason was that in the build-up to the crisis, and after it had struck, the FSA and the Bank of England performed badly as institutions but also in terms of their co-ordination. The story is well known and I will not rehearse it here but I would point to one big difference between those two institutions. The FSA admitted error ages ago and instituted an inquiry while the Bank of England refused to do either until very recently, and then it was very grudgingly.
	Clearly, Governor Montagu Norman's maxim that the Bank should "never explain, never excuse" lives on. Against that background, I find it strange that the Government should feel that the Bank of England's record before and during the crisis, and indeed since, is such as to warrant it receiving the vast increase in powers that are being lavished on it. I also recall from personal experience as well as anything else that the Bank's record of financial regulation in the 1990s and the early part of this century was far from ideal. Johnson Matthey, Barings and, of course, the secondary banking crisis all come to mind.
	I am glad that the Government have agreed that the Chancellor should have the power of direction over the Bank of England for use in a crisis where public funds are at risk and that they have put the Bank of England and the Treasury under a statutory duty to co-ordinate when managing threats to financial stability. But that does not alter the fact that in normal times during which the conduct of policy will either avoid or provoke possible crises, the Bank of England will wield enormous powers for which it must be held accountable. I will revert to that point in a moment but I want first to deal with another.
	Instead of seeking to improve on the institutional structures that they inherited by adapting them and the way they interact in the light of experience, the Government have opted for root and branch organisational change. That is the same choice that they have made on the National Health Service. It is a strategy that always involves very great dangers, because it creates the classic conditions, during the process in which the changes are taking place, of uncertainty, in which risk management, the reconciliation of diverse objectives and keeping reporting lines open can go awry.
	I have other worries, too. The burden on the governor will be immense, as other noble Lords have pointed out. He or she will be the master of monetary policy and both micro and macroprudential regulation in the world's fifth or sixth largest economy and its second largest and most complex financial centre. That is quite simply too much for one person.
	In addition to these responsibilities, as again has been pointed out, the governor will have to function effectively at the European and international levels and will have a constant responsibility to justify his or her actions to Parliament and the general public. Finding somebody to fulfil all those roles is going to be very difficult indeed and, however good the person who is chosen, they will bear an immense burden, which I think it is very unwise to create.
	I also fear that problems in one area of the Bank of England's activities will contaminate its reputation and abilities in others. In particular, I fear that any controversy, let alone any errors, in its handling of regulatory matters will contaminate its reputation and render more difficult its handling of monetary policy. Regulation is always a subject of crises and controversy-that is the nature of the beast. So I do not see how this form of contamination can be avoided.
	My final fear under this head is of group think, to which a number of noble Lords have referred. Under the tripartite system, co-ordination could and did go wrong. Under the new one, there is the danger that there will not be enough debate, exchange of ideas, free expression and thinking outside the box about issues, dangers and what might be coming down the track. This is not an unfounded fear. If ever there was an institution prone to group think and institutional orthodoxy, it is the Bank of England-and I have already referred to Montagu Norman's dictum, "never excuse, never explain". The Bank of England has been going for more than 300 years. It is a very fine institution but, like any great institution, it has faults and other characteristics, which are very difficult to eliminate and are likely to endure. That is why it is very dangerous to put it in such an overwhelming position.
	This brings me to the admirable report of the Commons Treasury Select Committee. The Government have chosen the wrong way to reform but, given the route that they have decided to go down, the Treasury Select Committee's recommendations are absolutely essential to guard against the inherent dangers of the new system and enable it to work properly. I will not enumerate the recommendations in detail, because others have referred to them and we are time-limited. But I attach particular importance to the recommendations relating to the role, powers and composition of its proposed supervisory board. I also think that the role, powers and character of its chairman are a matter of great importance, as are the manner and terms of appointment of the governor and the need for published indicators of financial stability by which the Bank of England's performance in that field can be assessed. Finally, under that heading, what the report has to say about the role of external members, both of the supervisory board and of the various committees, is very important indeed. I urge the Government to look very closely at this report and accept most of its recommendations.
	With this Bill, the Government are creating an overmighty subject, whose decisions will impinge directly on households and businesses. The Treasury Select Committee's proposals will go a long way to ensuring that it is subject to proper internal control and parliamentary accountability. They will also help it to function better than would otherwise be the case and, perhaps, to overcome some of the fears and doubts that I have expressed.

Baroness Cohen of Pimlico: I declare an interest as a non-executive director for many years of the London Stock Exchange and a veteran, like many of us here, of the financial crisis. There is much to welcome in this Bill, but that does not include the format, which involves the amendment of a couple of other Acts and is painful and confusing-and above all not at all user-friendly. It adds to the conviction that regulations are confusing, arcane and accessible only to experts.
	I had the honour of sitting on a committee of this House chaired with patience and clarity by the late, lamented Lord Newton, called the Tax Law Rewrite Committee. It did not, of course, rewrite tax law, because we could not, but it codified it so that anybody who wanted for example to get a grip on capital gains tax had only one Act to refer to rather than juggling several Acts at once. If it was worth doing for capital gains tax, how can it not have been worth doing for a major Act to govern for many years the vital regulation of financial activity? The Bill is of course for the long term, but could we not have started with a self-contained document?
	However, as my noble friend Lord Turnbull observed, we are where we are-and there is much to welcome in this Bill. It is particularly pleasing to feel that your Lordships' House is in agreement that we must all get the best Bill that we can, however difficult the format. The effective regulation of our financial services industry is vital to stability, for consumers to save and businesses to invest, and getting the balance right is vital for any Government, especially as so many jobs depend on it.
	As someone who has spent the past 11 years concerned with the working of capital markets, I welcome particularly that those markets, including the London Stock Exchange, will be regulated by the Financial Conduct Authority. I welcome the announcement this morning of its chairman, John Griffith-Jones, and expect that he and his CEO, Martin Wheatley, will make a strong team. It is also greatly welcome that the Government have listened to representations on the appropriate home for market regulation and have confirmed that the UKLA will be located in the FCA. It is of course true that effective regulation does not depend on structure, but it is a very good start to have the working parts of successful capital markets regulated in the same place.
	The Financial Policy Committee will have the power to move markets and affect consumers, as the Monetary Policy Committee now does. In designing the body, the Government have taken powers to contain the use of those very powerful tools to prevent a negative effect on the real economy. However, the Bill is not consistent or clear about how to meet that objective, and we need to clarify it. After all, the Financial Conduct Authority is going to regulate capital markets, which are estimated to support over 7 million jobs in UK companies, and in the financial sector will regulate 27,000 firms, which contribute £63 billion in tax revenues and provide over 2 million jobs-two-thirds of them not in London. Furthermore, the authority will be a global ambassador and the first point of contact with the UK for international businesses. It needs and deserves a consistent view, which will continue under a Government of whatever character, on markets and the desirability of maintaining the competitive position of the UK.
	The original FSA statute provides that the FSA must have regard to,
	"the international character of capital markets and the desirability of maintaining the competitive position of the United Kingdom".
	As it stands, the Financial Conduct Authority will not inherit that requirement, despite the FCA regulatory approach document published last year stating that,
	"the regulation of markets for capital-raising and trading has worked well".
	If that phrasing is to be discarded, the proportionality principle needs to be clarified in the Bill. The current definition is too vague to be useful. For example, it speaks of benefits and burdens "considered in general terms", whereas a reference to the impact on the growth of the economy, as the Bill already has in relation to the FPC, would be more tangible.
	Proportionality is supported by a requirement to carry out cost-benefit analysis, but again the Bill provides no explicit direction as to what costs should be considered. For example, a direction to consider the impact of actions on the attractiveness of the UK as a business location would be more specific. In their response to the Treasury Select Committee, the Government stated that they see the proportionality principle operating to,
	"help to ensure that the UK remains a competitive place to carry on business in the financial sector".
	The Government's intention in this respect should be reflected explicitly in the Bill. A wide coalition of business groups backs the need to keep regulators focused on the attractiveness of the UK for international business, including the CBI.
	The Government have shown real willingness to act in the national interest in the international market. I cite the less well known current action against the European Central Bank, which sought to provide that euro-denominated transactions can be cleared only in eurozone countries. The Government have gone to court to prevent this. The Government's support for trading on the renminbi is also thoroughly welcome.
	However, in a highly competitive market we cannot take for granted the capital markets' manifest advantages such as location in a time zone handily placed between the major markets of the USA and the Far East; deep liquidity; and skilled and experienced market participants and financial services people. We can afford to ignore the odd petulant threat from individuals to take off for the Cayman Islands or worse, but in dealing with large, foreign-based companies it is always vital to remember that they do not have to come here. The welcoming arms of Hong Kong or New York beckon them and we should always be conscious of this.
	Therefore, I submit that we need a constructive debate about what proportionality means in order to ensure that the Bill effectively delivers the Government's vision of regulation that supports, not undermines, the competitiveness of the UK and the impact on growth and jobs. This is not about light-touch regulation-the FCA does not regulate the banks, and will not-but about the 7 million jobs in UK companies supported by markets which are subject to FCA regulation, and the £161 billion which has been raised by companies on UK markets since the start of the financial crisis. There is a real balance here that the Government need to acknowledge in linking the actions of the FPC to the growth of the economy, and in their statement of intent for proportionate regulation to support the competitiveness of the UK. This is about a system which will endure and continue to deliver an effective balance.
	The Joint Committee that scrutinised the draft Bill stated:
	"To be successful the reforms will have to change the regulatory culture and philosophy ... A change in culture is not something that legislation can guarantee but legislation can influence the culture of a regulator by: ... setting objectives; ... allocating and aligning powers and responsibilities ... establishing appropriate systems of accountability".
	The culture of regard to regulatory impact on the real economy, jobs and the UK's competitiveness is alive and well, but if it is to endure for the future, the legislation needs to be more precise in stating this. The proportionality principle is the right place to start. I look forward to discussing this in Grand Committee.

Lord Hunt of Wirral: My Lords, I declare my interests, set out in the register, as chair of the Lending Standards Board and the Press Complaints Commission, as well as being a practising solicitor and partner in the global commercial law firm DAC Beachcroft for nearly 45 years.
	The Bill establishes a new framework for financial regulation in the United Kingdom. I share the determination of colleagues to improve the Bill, including that of the noble Baroness, Lady Cohen of Pimlico, whose expertise and experience in this matter I greatly respect. I warmly welcome her emphasis on proportionality. However, I would like to concentrate my remarks on the regulation of consumer credit. I support the move from the OFT to the Financial Conduct Authority. This will result in all retail banking products becoming the responsibility of one statutory regulator, bringing benefits for consumers and firms and avoiding the problems of split regulation. I am, however, concerned that there is still no decision about what type of statutory regime is appropriate for consumer credit-the regime which existed under the Financial Services and Markets Act or the Consumer Credit Act or, as is now proposed, a combination of the two.
	I want to make it clear to the House that I strongly believe in self-regulation, particularly effective self-regulation. It has concerned me that to date little consideration appears to have been given to what role self-regulation through industry codes might play in the new regime. I do not believe that it should be a choice between statutory regulation or self-regulation; they both have a place. I strongly believe that the best outcome would be for them to continue to co-exist. We should take the best of what each has to offer to achieve an appropriate and proportionate balance between consumer protection and the commercial needs of a properly functioning competitive market. The new regime has to be demonstrably better than the sum of the current constituent parts; otherwise, why on earth are we incurring the considerable transitional costs and risks? Therefore, in my view, self-regulation remains important and relevant. In consumer credit, the lending code sponsored by the British Bankers' Association, the Building Societies Association and UK Cards Association, and enforced by the independent Lending Standards Board, which I have the honour to chair, has an excellent track record and I believe is seen by consumer bodies and other stakeholders as efficient and effective. Of course, industry can and should take a lead in rebuilding the trust and confidence of its customers, but this will not be achieved overnight and I support action on a number of fronts. However, one of these must be effective self-regulation.
	There are five principles of good regulation and, for me, the most important is proportionality. Regulation should be proportionate to the risks posed and costs should be identified and minimised. Vast tomes of very prescriptive statutory rules will usually add little to consumer protection. There is increasing concern about the potential costs of moving to and complying with the proposed new regime-costs that will, of course, ultimately have to be borne by the consumer. I strongly agree with the noble Baroness that at the moment the Bill is not user friendly. However, I was very pleased to see reference to the principle of proportionality in Clause 5 in new Section 3B(1)(b) at the bottom of page 28 of the Bill.
	I would like to see self-regulation in the following form. I want there to be strong codes of practice with effective independent monitoring and enforcement that would not only be proportionate to the perceived problem or risk but score highly against the other four principles of good regulation-consistency, accountability, transparency and targeting. What do I mean? Self-regulation can set higher standards than statutory rules. One such example is the latest set of provisions introduced into the lending code whereby banks must retain responsibility for the fair treatment of customers after a debt has been sold to a third party. Voluntary codes can also avoid super-equivalence problems where they set standards that go beyond European regulations such as the EC Consumer Credit Directive.
	I could give many examples. Codes offer a vehicle to embody industry best practice and can cover areas that are not appropriate for inclusion in statutory rules. Self-regulation is more flexible and responsive to change and emerging issues. Codes provide a level of conduct of business detail that supports high-level statutory rules and can help industry better to interpret and apply the statutory requirements. It is better to have one externally visible code than myriad different lender-specific internal codes. Codes can also be market-focused or product-focused, as compared with the broad generic approach that is symptomatic of statutory regulation. That would produce much better consumer outcomes.
	Improvements to self-regulation must be part and parcel of this approach. A number of codes of practice currently operate in the consumer credit market. Not all have standards that are as robust as those contained in The Lending Code or the FLA code to which my noble friend Lady Noakes referred. These codes are followed by the major banks, building societies and credit card providers. In promoting the case for self-regulation as a component of the future regulatory regime for consumer credit, Governments should encourage the sponsors of these codes to look at strengthening their rules, as has recently happened in the payday lending market. Most importantly, they should ensure that the codes are independently monitored and enforced.
	The new regime would benefit from a close working relationship between those enforcing such codes. Ideally, there should be some provision for recognition or endorsement of codes by the FSA. Endorsement could provide a degree of protection for firms if they were to follow the codes' provisions. That would encourage commitment on the part of the industry. I do not think that the statutory regulator would be abrogating ultimate responsibility; it could work along the lines of the OFT's compliance partnership approach.
	In conclusion, self regulation is the right way forward-complementary self-regulation policed by an independent regulatory body that would protect the consumer without destroying the creativity and competitiveness of the market. Unfortunately, statutory regulation tends to be very heavy-handed, whereas self-regulation can supply not a light hand but a firm hand-and sometimes even a helping hand.

Lord Barnett: My Lords, we are debating the Second Reading of a large Financial Services Bill that is split into two parts to make it look smaller, I suppose-one containing the clauses and the other the schedules. When I first saw the Bill, I was reminded of days long gone when I took Finance Bills through both Houses. I was in opposition on Finance Bills to the noble Lord, Lord Lawson, and we debated them at great length over many years. We considered two Bills a year in my time-the second amending the first. I fear that that will happen again because Oppositions of all parties tend to choose the sexier points of a Bill to debate and leave the main parts undebated and unscrutinised. The situation is a bit better these days, in the sense that the House of Lords-although Finance Bills are money Bills, and this Bill is not-examines clauses in Select Committees, of which I have been a member. They do a good job, but it is very limited. The Commons does nothing at all about these matters.
	The situation is not much improved these days, although I hope that this Bill will be a lot better because it has had a great deal of pre-legislative scrutiny. We have had Select Committees, Joint Committees, Command Papers and White Papers. In fact, there is so much paperwork attached to the Bill that I confess I have not read it all. I am sure that every other Member of the House who has spoken will have done so. I hope that the pre-legislative scrutiny will help, but despite all that, I hope I will be forgiven for believing-as with Finance Bills-that we might see in years to come a lot more Financial Services Bills that amend this one.
	The Bill amends a number of Acts, not least the Bank of England Act that the right honourable Gordon Brown, as Chancellor, introduced to the House of Commons. At the time, I thought that it was not a bad Bill, apart from in one or two major areas. However, in practice, I had reservations. In an article in today's Financial Times, John Gieve, a former senior Deputy Governor of the Bank of England, said:
	"The debate so far has revolved around one fixed point: the assumption that no change is required in any respect to the ... Monetary Policy Committee".
	He had obviously not read or heard my speeches over many years because, together with the noble Lord, Lord Peston, who is my noble friend and professional tutor, I tried to persuade the Chancellor at the Second Reading of that Bill-we also did so privately-that he needed to make a major change that has been referred to by a number of noble Lords, I think even in the excellent maiden speech of the noble Lord, Lord O'Donnell. There were three words in that Bill which should not have been there. The words were "subject to that". They meant that the Monetary Policy Committee must look at the problem of inflation and only then-I repeat, only then-look at the major economic and financial problems that the country faced. I give notice to the noble Lord, Lord Sassoon, that we will try again-given that the Bank of England Act is referred to in the Bill-to remove those three small words.
	The real question before us is whether the Bill will deal with the kind of crisis we had in 2008. A number of noble Lords have expressed doubts. The noble Lord, Lord Tugendhat, with whom I very much agreed, asked why on earth the Bank of England, of all places, should have huge powers such as those given to it by the Bill. After all, its past record would not normally justify giving it greater powers, yet that is what the Bill does in a big way. We are now going to have deputy governors of the Bank. All we are told is that the Bill is to avoid a repeat of the financial crises that we have had in the past. Perhaps I may express the hope that it will do that-but I doubt that it will because the plain fact is that part of the reason for the crisis, as the noble Lord, Lord Sassoon, mentioned, was what happened when Northern Rock was lending 120% mortgages. Auditors have been blamed. In my long-lost past when I was a junior auditor and before I became a senior partner, I often wondered how I would deal with an audit of major banks lending at this rate. Under their present terms, auditors could not deny them a certificate, and of course this Bill will not do anything about that.
	I have a feeling that we have this the wrong way round in that this Bill should have come after the banking Bill. I ask myself whether all the new prudential regulations and new committees-the new Financial Policy Committee and the new Financial Conduct Authority-should have come up for discussion after the introduction of a banking Bill, which we are now going to have. Perhaps the Government will tell us when we will have that Bill and when it is likely to become an Act. It is urgently needed. I would not like to say that without such a Bill all the banks are going to be unable to cope with the sort of crisis that we met in 2008, and ultimately it may well be that without sufficient scrutiny, as I mentioned, that Bill will not achieve any kind of objective. Perhaps after nearly 48 years in one House or the other I have become overly cynical. Perhaps I have taken through too many Finance Bills and have debated finance and economics too often. I hope that I am not cynical but I fear that I am. It is very difficult to be confident that the great new structure brought in by this Bill is going to solve the problems that we are facing and meet the objectives clearly set out in the Bill.
	I do not agree with noble Lords who said that they regret that the Bill is to be taken in Grand Committee. I find that Grand Committees provide closer and more detailed scrutiny of Bills. This is not the kind of Bill that is helped by being debated on the Floor of the House. Our House is a bit like the House of Commons in that only the sexier parts are debated at length, whereas in Grand Committee you can look at Bills more closely.
	I look forward to the amendments that will be moved by me, my noble friend and many others. I hope that ultimately my worst hopes and excessive pessimism will not be met and that the Bill will emerge in a better form than it is in today.

Baroness Valentine: I declare that I am chief executive of London First, a not-for-profit business membership organisation, whose members are drawn from a wide range of business sectors, including banking, insurance and professional services firms, and their customers
	Over centuries and through several crises, the UK has built a global reputation as a safe and honest place in which to do business. Its financial sector is seen to offer a deep pool of knowledge and expertise that is, arguably, unrivalled. Businesses value this expertise and the ability to harness it to their own requirements. These can be as diverse as raising capital, structuring and financing mergers and acquisitions, or hedging against price fluctuations in their raw materials. These are essential services for businesses. Therefore, in developing the framework for regulating the financial sector, we must take into account the likely impact on not only the financial institutions themselves but, perhaps more importantly, their clients.
	For business, the price, range and availability of financial products and services will be contributory factors in achieving economic recovery and maintaining international competitiveness. With this in mind, I join other noble Lords in expressing concern that the proposed objective of the Financial Policy Committee is solely to focus on ensuring financial stability. This objective should, I believe, be complemented with a duty to foster an environment in which the financial sector can continue to support economic development-for example, by helping to ensure a stable supply of credit.
	When we look at other national regulators or central banks, we see that they are often given similarly balanced objectives. For example, in the US the Federal Reserve maintains the goals of maximum employment, stable prices and "moderate" long-term interest rates. The Reserve Bank of Australia has both its social and its economic purposes clearly defined in law. Its job is to ensure that its monetary and banking policy contributes to,
	"the economic prosperity and welfare of the people of Australia".
	Closer to home, as other noble Lords have noted, the Bank of England's own Monetary Policy Committee includes in its objectives the aim of supporting the Government's,
	"objectives for growth and employment",
	albeit, as the noble Lord, Lord Barnett, notes, as a subsidiary objective.
	Financial stability must, of course, be a core objective of the regulatory system-it is a precondition of economic well-being-but it should not be the only criterion against which we measure success and, indeed, we should not be seeking financial stability at the cost of economic development. If we do so, we risk hard-wiring a bias towards conservatism into the new regulatory architecture. We have to recognise that innovation is part of what will keep us at the cutting edge of global markets. Without it, the economy will continue to be stifled.
	At a time when our economy is in a double-dip recession with an anticipated slow and bumpy road to recovery ahead, all aspects of the regulatory framework, including financial regulation, should be designed and implemented in support of growth. I cannot see why this approach is not relevant for the Financial Policy Committee and, in his closing remarks today, I would welcome some explanation from the Minister of the rationale for adopting such a narrow brief.
	I further note that the Government have established a Regulatory Policy Committee to ensure that any new regulation meets the principles of good regulation. There is a strong argument for bringing the FPC and its sister bodies within its scope.
	My second concern relates to the approach that the UK is taking towards integration with the new European regulatory framework and the need for those working with the new European bodies, on the UK's behalf, to have relevant market experience and expertise.
	Increasingly, the regulation and supervision of financial services is driven by decisions taken outside our Parliament at a European or G20 level. This is right if we are to ensure a consistent approach to supervising global institutions, but it seems strange that the proposed UK framework does not correspond to the recently established European framework. We appear to be developing a new imperial system while the rest of Europe consolidates a metric one.
	The UK already punches below its weight in voting terms. Despite having more than 35% of the European wholesale financial markets, under qualified majority voting we have fewer than 15% of the votes on decisions governing those markets. British nationals occupy only 5% of the posts in the Commission, even though we make up 12% of the population, and that proportion is falling. At a time when the so-called Anglo-Saxon model of financial services faces considerable suspicion from some quarters, for the UK to be so under-represented is worrying. My fear is compounded by the general lack of experience of truly international financial markets among those responsible for regulation and supervision in the new European regulators. It is essential that Britain's regulators offer a coherent voice that can provide these new institutions with the expert guidance and insight they will need to fulfil their functions without damaging the very markets they have been established to protect.

Lord Lea of Crondall: I am most interested in the point that the noble Baroness has just made about whether we have the right number of people in Brussels, Frankfurt or wherever. Is that the view of her constituency in the City of London and, if so, what are the members of that constituency doing about it?

Baroness Valentine: I could give a long answer to that. I do not believe that industrial representatives from the City are necessarily welcome in the European supervisory bodies, and that creates a complication in dealing with that particular issue. I think that they would be happy to put forward people but you have to be clear that the Chinese walls are there. I am not sure whether that answers the noble Lord's point.
	I welcome the Government's creation of an international co-ordinating committee to present issues and concerns from the UK regulatory bodies. However, I believe that its effectiveness and credibility would be enhanced by mandating a secretariat made up of individuals who have experience of the international markets and have worked in international organisations. This would be a significant step towards ensuring that the UK's contribution to EU financial regulation was proportionate to the importance of the financial sector to our economy, and would send a clear signal that the Government recognised that contribution.
	Last week the chairman of the Treasury Select Committee commented that this Bill was,
	"the most important overhaul of financial regulation ever undertaken in this country ... It is crucial that we get it right".
	I could not agree more.
	Despite laying claim to be the birthplace of modern football, it is many years since any of our national teams have been dominant on the field-as I fear the French may well be demonstrating this evening. I do not know the score.

Noble Lords: A draw.

Baroness Valentine: A draw. However, we have long been pre-eminent in financial services and we should aim to remain so. I therefore urge the Government seriously to consider the suggestions I have made this evening.

Lord Lucas: My Lords, it is very important that when we come to the Report stage of this Bill and the arguments that we will doubtless still be having with our Front Bench, we vote according to our expertise and not our politics. We are holding ourselves out in this House to be a source of expertise. The debate, at least until now, has demonstrated that to excess. If we allow ourselves, when it comes to votes, to be pushed around by our Whips, we become a mere House of politics, which is what Mr Clegg wishes to make us. If we are to be a House of politics let us be elected and get it done with. If we are going to be a House of expertise, it is important that when an argument has been won in this House and the Government still resist it, our views make their way down to the other end. I very much hope that when my noble friends and I come to discuss such important points as the duties and responsibilities on regulators, and we have reached a settled conclusion in this House, we vote that way and do not let ourselves be put off by spurious political considerations. We are a House of expertise. We should be proud of it and we should live up to it.
	It seems to me that many of those who have spoken have focused on the way in which duties are placed on the various regulators. This is crucial; things obviously have to be divided between ministries and responsibilities are given out to one or another. The same happens with bits of ministries, but if you do not allow some overlap, you get situations like the current spat between the UK Border Agency and BIS where the UK Border Agency regards university students as some kind of poisonous plague and BIS, quite rightly, wants to encourage as many as possible. We need the UK Border Agency to have regard to the effect of its policies on the economy as a whole rather than just on immigration. You need to blur the boundaries from time to time and to place responsibilities on agencies that go beyond the powers that they actually have, so that they take into account the wider effects of what they do. The case has been very well made today that we must have regard to that consideration in this Bill.
	I will focus mostly on minutiae The big picture has been well covered by people who know it better than I do. I reassure my noble friend the Minister that during the Committee stage I will not try to insert any of these peculiar particular considerations into the Bill, other than making sure that the regulators, when they are created, have the power to deal with these things without having to come back for primary legislation. The three things that concern me particularly are high-frequency trading, consumer regulation and disintermediation. High-frequency trading has got to the point where stock exchanges-I do not know whether this is true of the London Stock Exchange, but it certainly is for some of the American exchanges-are allowing privileged access to data streams to high- frequency traders. These people with their computers are sitting co-located with the Stock Exchange. They are getting the data before anyone else, so the common experience of a pension fund manager trying to shift a block of a few million shares is that the market moves ahead of them because the high-frequency trader can see what is happening. This is licensed insider trading. The only people who benefit are the few running these specialist computer installations. The people who suffer from it are all of us through lower returns on pension funds. It is a thoroughly undesirable activity.
	I am no friend of the Tobin tax; I can understand why people want to impose it but I do not think that it would work. However, we have to find a way, either through looking at the definition of insider trading which, it seems to me, high-frequency trading is well over the boundary of in some instances, or by looking at things like instant registration of share ownership. Why not update that so that companies have much more control of who is on their register rather than having a sea of unregistered deals out there? Why not bring company registers up to date and see what benefits that might give? I want the regulatory authorities to be able to explore those sorts of questions. It will take time but I do not want them to find that they are limited in what they can do in the way they are at the moment with consumer regulation.
	There is a boundary between what the FSA can look at what it cannot when it comes to collective investments. You would think when you read the pages of the Guardian or similar newspapers with their whole-page spreads for tropical forestry investments that they were collective investments. They are in the sense that a lot of people are piling into them all together. But because the investment at the end of the day is in individual named trees, the FSA cannot touch it. These are the most monstrous scams and people will suffer because of them. There was a supplement in the Guardian that must have had five or six whole pages of advertisements for these things. Why the Guardian deserts its responsibility to its readers to that extent I do not understand, but at some point these things get big enough so that the FSA should take an interest. I do not want it to be hobbled by provisions saying that there are artificial boundaries that the FSA cannot cross. It must be able to look at the effects that these products have on consumers, the likelihood of disaster and misbehaviour, the way in which they are sold to unsophisticated customers rather than sophisticated customers and say, "This looks like an area that we should investigate and therefore we can", rather than being obstructed by technicalities.
	The same appears to be true of some wine investments. This is not something that is without its extensions. The noble Lord, Lord Whitty, raised the interesting question of customer data and how Tesco Bank would be able to combine my liking for baked beans with my banking records. I can see why that would be useful. You say a lot about yourself in your pattern of purchases. Doubtless it could use that in judging my creditworthiness. Perhaps it is a good idea that it should, but we jolly well ought to debate it. Whatever financial regulator we create ought to be able to deal with that sort of emerging problem as it comes along.
	Lastly, I come to disintermediation. I shall not take long because Andrew Haldane of the Bank has said such wise things about it. We have to make sure that the regulators we produce can unblock the road. At the moment they are in a totally ridiculous situation. The Treasury says people like Zopa and Funding Circle, which are disintermediating between members and borrowers, cannot have tax offset. If you make a capital loss because some of your loans go bad, you cannot offset that against the interest you have earned. So, this restricts these operations to only the finest possible lending. It also says that they cannot put their products into ISAs or similar things. It says they cannot do these things because they are not regulated and they are not regulated because the Treasury will not let them be regulated. We invented this disintermediation. I think that I am right in saying that Zopa was the first in the world. It is as if we had invented Google and then prevented it doing business. There are now hundreds of these things all around the world, but we have a block on the development of our own industry, which could be a fundamentally good thing that would offer new opportunities.
	When the right reverend Prelate the Bishop of Durham comes to look at community lending, he will see that we will be able to produce the sort of disintermediation structures that work at a local level. When the sector becomes sizeable it will start to reduce the burden on the Treasury of the £85,000 guarantee, because the direct system will not qualify for that. We will start to attack the whole problem of lending short and borrowing long, because if we do it through the likes of Zopa or Funding Circle we will take the time risk but we will have a tradable asset. Therefore, we will get rid of the systemic risk that caused such great problems in the banking sector. We ought to encourage these things, but the Treasury has put a total block on their development and as a result the rate of growth in this country of that kind of business is terribly slow.
	We must make sure that in producing new structures we are conscious of the fact that there will be people who will want to innovate in disintermediation. It is not only mechanised lending that is capable of disintermediation; investment management is also capable of it. We are conscious that investment managers as a class earn very large rewards. We are beginning to see disintermediation at the seed capital end of things. I am associated with one such firm. It would be nice to see that in mainstream investment management. We ought to be able to disintermediate annuities. Old people want income, young people want capital. That is a classic disintermediation opportunity, but it will be possible only if we write the regulations correctly. Otherwise, we will put young firms at a total disadvantage compared with the established, regulated operations against which they are trying to compete. The Bill ought to be on the side of innovation and dispersing rather than concentrating risk, but at the moment it may not be.

Lord Borrie: My Lords, a short while ago the noble Baroness, Lady Valentine, quoted the excellent chairman of the House of Commons Treasury Committee, Mr Andrew Tyrie, who described the Bill as,
	"the most important overhaul of financial regulation ever undertaken in this country".
	She will know that, at the conclusion of the Bill's discussion in the other place, the committee considered that it left there still defective in a number of significant respects.
	I will concentrate my remarks this evening on the consumer protection aspects of the Bill, and on the role it gives to the Financial Conduct Authority. I appreciate the valuable role of the other regulatory body created by the Bill, the Prudential Regulatory Authority. It will be just as important to consumers as to big and small businesses, and to the economy generally. We all benefit from financial stability; we all need a firmer base for avoiding financial crises in future.
	The Bill makes it clear that a key objective of the Financial Conduct Authority is to promote effective-I emphasise "effective"-competition. At present it is evident from a number of matters, including the existence and persistence of many expensive short-term, quick-fix payday loans, that competition is not working. If it were working properly, the detriments that these loans often have of imposing not only high charges but high default charges would disappear from the marketplace.
	Among the essential requirements for effective competition is clear information that is understood by the people who see it. It has been commonly thought by the intelligentsia, consumer groups, the Civil Service and successive Governments that the annual percentage rate is the best way of enabling consumers to compare different offers of credit. If we were all sophisticated, the APR would have a lot to recommend it. However, a percentage sign with whatever number is in front of it is not as readily understood by the great mass of people as a pound sign: how much they will have to pay in interest. What is often needed-not as a substitute for APR, which is perfectly good for all sorts of obvious reasons, but in addition-is a clear statement in cash terms of the total cost of credit. If that were explained to people, many loans that were objectively undesirable would not be taken out.
	I am happy to note that among the supporters of this proposition is the Trading Standards Institute, of which I have the honour to be a vice-president. However, it also wants a legal cap on charges. I have never been sure about the case for a legal cap, on the grounds that other noble Lords expressed today: namely, that many borrowers would be worse off if they were pushed into the arms of unregulated and unlicensed moneylenders whose debt collection methods would be likely to involve threatened or actual violence. I am sorry that the right reverend Prelate the Bishop of Durham is not in his place. He said many important things about the value of mutuals and credit unions, and about the serious disadvantage of unlicensed moneylenders purveying credit to members of the public.
	The relevant trade associations have agreed to improve their codes of practice. I agree with the noble Lord, Lord Hunt of Wirral, that improving codes of practice may be a substantial help. However, it would be a pity not to take up the opportunity of putting into the Bill certain legal requirements to make it clear that we are not just urging people-codes of practice usually "urge" people-to think carefully before taking out a short-term loan, but are making it much clearer that these loans are expensive.
	I referred to the need for the consumer to get clear information in order for effective competition to take place. There is also room for discussion of improvements to the Bill proposed by Which? to require the Financial Conduct Authority to ensure that information provided to consumers is "accurate and intelligible". This wording would be more helpful than that in Clause 5, which uses the currently popular phrase "fit for purpose", which is far vaguer. I am fond of the phrase "fit for purpose"-as is anyone who has studied the Sale of Goods Act in its original form. However, people have borrowed it to refer to all sorts of unrelated matters and it is not terribly clear.
	One of the most useful and imaginative consumer protection provisions of consumer credit legislation was the creation of joint liability in law of finance companies and traders who provide goods or services. Section 75 of the old Consumer Credit Act 1974 indicates that when goods are bought with credit provided by a finance company or card company, the finance company is deemed to be engaged in a joint enterprise, and usually it is the finance company which has the greater resources to meet any claim for breach of contract the consumer may want to bring.
	In the course of the Bill's progress in another place, the Government stated their wish to replicate that provision in the Financial Conduct Authority consumer rule book. However, they seem to have found that that would not be strong enough and that it may be necessary instead to keep the provision in the Consumer Credit Act, to which I have already referred. The noble Baroness, Lady Noakes, referred to this problem and the Finance and Leasing Association, in its briefing to noble Lords, also referred to the matter.
	It is not very clear from government statements in the other place what is to happen. We know that the licensing powers of the Office of Fair Trading are to be transferred to the new body by secondary legislation but, as the FLA fairly asked the question, what about the transitional arrangements? What will happen in between time? We know that other legislation is being brought forward by the Government to merge the Office of Fair Trading and the Competition Commission, so what will happen to the current licensing powers that the Office of Fair Trading has under the Consumer Credit Act? It is important to have clarity on these matters, otherwise things will not go clearly and smoothly. At the moment, the Government seem to have left us all-not only people such as myself but also the FLA-uncertain as to what the outcome will be.

Lord Naseby: My Lords, before I begin my speech I wish to offer an apology to the House in general and in particular to my noble friend on the Front Bench. Regretfully, due to the vagaries of public transport, I was not in my place as I should have been at the start of the debate. However, I have heard most of the speeches subsequently.
	I wanted to take part in this debate because, as we all know, the financial sector is absolutely vital to the success of this country. It does not matter whether you are a small shopkeeper, a SME or any other form of business, a major or minor saver, the success of our country stems from the success of the financial sector. The Bill, huge as it is, has the potential to create the right conditions providing not only that the structure is there but that we can find the men and women to use, work with competence and understand the culture behind it.
	I do not have the skills or the competence to make a judgment on the major financial dimensions and controls of the Bill. Others who do have such competence have spoken today and I hope that my noble friend on the Front Bench will listen to and take on board what they have said today and what will arise in discussion in Committee.
	However, there is a certain area where I can claim some competence and skill. It straddles the area that my noble friend-I do treat him as a friend-Lord Borrie has half discussed this evening and I would like to add to that. He and the House will know that I have asked a number of questions about the Office of Fair Trading. Much of the work that it does is good, but there have been a number of examples, particularly in the recent past, where extensive inquiries have been undertaken over months and, indeed, years, costing millions of pounds to both the public sector and the companies or organisations that were under investigation and where it has been subsequently found that there was no wrongdoing.
	It has been mentioned by a couple of noble Lords that we are now in a transition period. It is very important in a transition period, if I may use a cricket metaphor, that the ball is not dropped in the slips. One of the areas that deeply concerns me at the moment is that of payday lenders. I asked Citizens Advice whether there was a current short example that I could quote to your Lordships. In November 2011, a citizens advice bureau in the West Midlands saw a woman who was earning £880 a month. This did not prevent her taking out 19 payday loans. She was granted these short-term loans. By the time she came to the citizens advice bureau her entire wages were being taken up in debt repayments. As a result, she was having to use payday loans to replace her income, not to supplement it for short periods as payday lenders suggest in their advertisements.
	I was in the world of advertising and I listen to the advertisements and it has come over in the past few days that there are a number of companies in this area. The new authority which is to take over has to have a competence not only to license particular companies in the payday loan area-there is a function there that is required-but has to have an ability to take action early before matters escalate out of control. We are in a transition period and I say to my noble friend on the Front Bench that I hope we will not allow this problem to escalate out of control.
	There is a second area in which I have some competence. In the past I had the privilege of being chairman of a friendly society. I took through the House the Building Societies (Amendment) Bill, which was started in another place by a former Member of Parliament, John Butterfill. The provisions of that Bill, which came into effect just before the financial crisis in 2008, gave some flexibility to building societies in what they could or could not do and allowed them to develop as good mutuals. Yes, I am one of those who regrets the demutualisation of so much of what was the mutual movement.
	When I was chairman of a friendly society we tried very hard to extend niche areas. We were a small operation with assets of only £1 billion at the time. We looked at the niche markets we could provide that were not available or on offer from the banks. Every time we tried the FSA put the claw of scrutiny upon us-which was fair enough-and it was very difficult to find new markets to move into and develop. The same applied to the credit unions. The child trust fund came forward and the friendly society movement received 25 per cent of that market. Indeed, without the drive and enthusiasm of the friendly society movement, the child trust fund would not have developed as it did. Sadly, the knife went in from the Liberal Benches. Whoever was to blame, the scheme could have been modified and need not have cost the Exchequer the money it was costing. The point I wish to make today is that the regulator has to look at the extent of the risk to smaller operations, which often tend to be community based, and not decide that just because they are small they are ultra risky.
	There needs to be a change in attitude in a number of other areas. One in particular is the alleged pension mis-selling situation. There is no doubt that there was some pensions mis-selling in the late 1990s. Equally, though, by the time we had gone through the FSA's requirements, we and many other small pension providers soon found out that, on a generous estimate, up to 25% of pensions might have been mis-sold. There is a requirement in life for a bit of caveat emptor, but the early claims companies got on the back of this and made it into a business of its own, almost regardless of the validity of the claims. Basically, the providers would say, "It is easier to settle than it is to contest this".
	The banks have also had to face challenges in relation to the selling of PPI and some other products. While a person who has genuinely been mis-sold a product should be properly compensated, with the new regulator we must not allow a situation to arise where it is far more troublesome to deal with a tidal wave of claims from the claims houses. They have very persistent people working in them, and it is cheaper to settle than to look at the validity of the claim.
	I shall finish by saying that my noble friend Lord Lawson, who has been in his place for almost the whole debate, mentioned the word "cost". Cost is a crucial feature in relation to anything in financial services, and particularly in relation to the controls and requirements being put on the industry. The new FCA will need to keep abreast of the comparative costs between what is proposed for the UK and what is happening in other major financial centres around the world. We need to remain cost competitive as well as control competitive.

Lord Desai: My Lords, this has been an excellent debate, especially the maiden speech of the noble Lord, Lord O'Donnell. I am reminded of a debate we had when we considered the Financial Services and Markets Bill. At the time we were sure that the self-regulation of various bodies in the City had failed-the noble Lord, Lord Hunt of Wirral, mentioned self-regulation-and that we needed cross-border co-ordination and an overarching authority. We thought we had that in the Financial Services Authority, because at the time the problem lay in the interconnections between different parts of the financial sector that were not well understood. I recall that we were proud of a special provision in the Bill to ensure that the chairman and chief executive of the authority would be the same person. Sir Howard Davies was chosen. We thought that the centralisation of authority in one person was key to the success of the authority.
	We have moved on, and now we have the Financial Services Bill "Act Two". I have absolutely no practical experience of anything, but I want to emphasise that these Bills are always based on an underlying concept. The conceptual basis of the FSA proved to be wrong. It was not just that it was based on light-touch regulation-we all believed in that-but that the kind of world we thought we were regulating was no longer the world that was out there. My main worry is whether, when these bodies have been set up, they will be able to deal with the problems they have to face. I shall take a line from my noble friend Lord McFall, who said that risk is a black box. Our main problem recently in the cases of MF Global, JPMorgan Chase and others has been that the people who are professional workers in the field can no longer grasp the kind of risk they are undertaking.
	What is also happening in the literature is that what was once the standard, basic concept, that of a financial analysis of value and risk, is now in doubt in that people wonder whether it is a robust enough concept to guide them through operations in the financial market. As it turned out in the case of JPMorgan Chase, the product it was engaged in putting money into was so complex that the top management, which is among the best management there is, did not actually understand the nature of the risk that its people were taking. Surprisingly, however, when the so-called London Whale was taking a position in the sovereign debt euro market, someone called the New York Monster sitting in New York knew precisely what was going on and spotted the anomaly in the big bet that JPMorgan Chase was taking. He decided that the bet had to fail. He took a counterposition and cleaned up. The market worked, but the institution has completely failed because the people in charge did not understand the nature of the risks that some of their subordinates were taking.
	That is exactly the story of Barings Bank. When it failed, it was because the top management at the bank did not understand why they were making so much money in the Far East. They were making money in the Far East because a man called Nick Leeson was taking unhedged bets on the yen. Those bets were publicly known to anyone who looked at what was happening in the Yokohama market. I remember discussing it here at the time. Not only did the top management at Barings not understand what had happened, the top men in the Bank of England did not understand it either. A report was later produced which we debated in your Lordships' House. These regulatory people face a problem: can they keep up with the nature of the reality, which is very fast-changing, complex and mathematical, so much so that even those operating in the field do not understand it? It is almost like playing rugby without knowing the rules, and even then the rules keep on changing while you are trying to play.
	There has been some coverage in the Financial Times of the failure of MF Global. It was run by Jon Corzine, a very accomplished man who had been with Goldman Sachs. When that large fund failed-the investigations are still going on-what clearly emerged was the fact that the firm had not set up sufficient internal supervisory and regulatory procedures in order to understand what it was doing. It is the long-term capital management story all over again. The company had taken a position believing that if differences in interest rates are very wide, they will converge. It is one of the basic propositions of Economics 101, except when it does not work. It does not work when things do not come together: when, in fact, they diverge. That is what happened in 2008 and it has happened again and again. Somewhere in the intestines of the FPC or whatever it is, I suggest that there ought to be a research capability that can tell those who are regulating how the reality is continuously changing.
	A piece by Gillian Tett in the FT last Friday mentioned an article by someone who worked for the SEC, which said that the thing is now so complex that although there is a reporting requirement on firms operating in the financial market in the United States, the firms themselves cannot describe what they are doing to the satisfaction of the SEC because they do not understand the nature of some of the things they are doing. One of the propositions in this article was that it is no longer that the firms are too big to fail; it is too complex to describe and depict what the firms are doing. This comes out of the fact that the people who do these things are in their 20s and 30s and the people who rule over them are in their 50s and 60s and have absolutely no clue what is going on. That problem will have to be dealt with at some stage. I do not know whether the Court of the Bank of England-of which one hears very little normally; it does not do anything at all, and is made up of the great and the good-is a functional part of the organisation. Someone said that it was the decorous part of the structure.
	The FPC will need seriously competent people who are able not only to understand how the market works but to keep up with the rate at which the market is changing. This is hard work. I once suggested in your Lordships' House-I will do it again-that it would be a very good idea periodically to examine people at the top of banks and financial institutions to see whether they understand the changing nature of the market they are in. We really have to license them and have an examination every three years; if you cannot pass the exam you are not competent to be at the top of a bank. This is exactly what happened at Barings. I do not make this suggestion facetiously; I think it would be a very important thing to do.
	If we have a world in which the products are so complex that the management of the company does not understand the nature of the business, it is time to think about breaking companies up or doing something so that they are a biteable, good size and people can grasp what they are up to. This would relate to the nature of the competition, and to the banking Bill that we are going to get in the future. Banks themselves have become very complex because they combine not just retail but investment banking and other things. Banks have failed because they were too complex. One of the tasks of the FPC should be to keep on doing research at a sufficiently high level so that it understands the complexity. The noble Lord, Lord O'Donnell, mentioned a joint parliamentary committee to which the FPC, the PRA and the FCA would all answer. We need political oversight so that these bodies are accountable.
	Finally, I cannot see how the FPC and the MPC can be two separate bodies with no communication between them. Someone has already mentioned that if the interest rate is the instrument with which you control inflation and things like that, it is also a very important instrument for financial stability. If you are going to do things like that, you have to be careful. It is a fallacy to think that macro and microprudential conduct are separate things. There are large micro units and their misbehaviour can have serious macro implications. That is another overlap between the FPC and the PRA that we ought to look at very carefully and not build Chinese walls that will be big obstacles to serious regulation.

Lord Flight: My Lords, I declare my interests as set out in the register. In particular, I am the senior non-executive director of Metro Bank, the new retail bank, and a commissioner of the Guernsey Financial Services Commission and thus myself a regulator. I also led for the Conservative Opposition 13 years ago in Committee in the other place for FiSMA, and even before that, back in 1974 I was briefly seconded to the Bank of England lifeboat, which did a pretty reasonable job in sorting out a lesser but very serious banking run at that time.
	On FiSMA, I was fiercely of the opinion that the central bank should retain responsibility for supervising the banking sector. It seemed natural that a central bank would be more likely to know what is going on. I spoke out equally strongly against the tripartite committee because when a crisis comes someone needs to be in charge. Both these issues were demonstrated most unfortunately in the 2007-10 crisis. I accept that the Bank of England has not acquitted itself that well recently. Indeed, in 2007-08, the Bank was still relying on its economic model, which told it that everything in the garden was dandy, and failed to spot a major banking run gathering momentum right outside its back door, where there was a Northern Rock office with queues of people lined up. The Bank of England needs some re-equipping and some intelligence restored in order to do the job that is going to be put on it and on the PRA.
	I would like to stress concerns voiced by others about the costs. I see it from the other side of the coin. In various investment management businesses, I see piles of paper that do no one any good, when really all that is wanted is integrity and, if you breach integrity, serious punishment. Everyone seems to forget that it is the consumer who pays. When interest rates are artificially low and equity markets have done nothing for a decade, no wonder no one wants to save when there are now enormously substantial regulatory costs as well. The noble Lord, Lord Hunt, was quite right: what is wanted is proportionality; regulation generally needs slimming down and looking at more effectively on a cost-benefit analysis. I also make this point to many of the consumer lobbies, who want more and more-allegedly in the interests of consumers-and forget that it is their consumers who are going to have to pay for it.
	It is dangerous to bury "buyer beware" completely. People need to understand what they are investing in and buying. Telling them, "Oh, it doesn't matter, the Government will look after you. If anything goes wrong, you will get refunded", is an extremely unwise mentality in the marketplace. Neither the FSA nor the new body should be expected to educate mature adults, which is a waste of time anyway, but much more should be done in schools. Financial literacy should be part of the core curriculum. It is gradually gaining momentum in terms of some tuition, but it is still pretty thin and most schoolteachers regard it as something with which they do not want to get their hands dirty, so more requirement should be made in that area.
	Another noble Lord made the point that the Bill does nothing at least to look at how the accuracy of data in reporting to regulators should be checked; nor has it done anything about FRSA, which contributed greatly to the banking crisis by hugely overstating bank profits in good years and vice versa in bad years and led to bank accounts that no one can understand. The accounting profession has some blame to bear and needs some reform as well.
	I hope that the Government will accept that the Bill needs quite a bit of tidying-up before it becomes law. I pick on one or two particular areas in the PRA. Life companies and their balance sheets are very different from banks. They need fair representation and need to be handled very differently from banks. The transfer of consumer credit arrangements, which I argued for 15 years ago, is something of a halfway house and needs looking at before this legislation is passed.
	The new fashion in transparency is fine up to a point, but excessive transparency can have dangerous, contrarian effects. Banks will write minutes as they think the regulator wants to see them and decisions will be taken outside the board meeting. Let us not have excessive transparency. In the area of publishing warnings, I know of situations in which the FSA got a major warning of a company completely wrong. If that had been published, the business might have been irrevocably damaged quite unjustly.
	The main innovation in the Bill is obviously the FPC, to provide macroeconomic and market oversight. I agree with my noble friend Lord Lamont and the noble Lord, Lord Desai, that the MPC and the FPC have to be one; if they are not, not only will there be conflict between the two but both bodies will overlap in the tasks that they are there to perform.
	The PRA and the merged FPC and MPC need pro-growth as well as stability mandates. As many others have pointed out, the financial services are a major employer and the biggest industry in this country. I am sure the Minister will say that they are not anti-growth, but, as with the Fed, there should be a balance.
	There is the question of accountability. Should those committees be ultimately accountable to the Treasury Select Committee? There is a star chamber element to the powers proposed for the FPC, and again there is room for at least some consultation with the industry.
	My two main points are about competition and governance. We have competition as a major objective for the FCA only in relation to the consumer. It seems blindingly obvious that a big part of our problems has been oligopoly in the banking sector. I remember arguing in about 2000 with Sir Eddie George that, post-Barings, it was very unwise that lender-of-last-resort powers were limited to banks that were too big to fail-a lot of the smaller banks, such as Hambros, closed down and one had the very moral hazard problem that I thought the situation would lead to. Although competition will not solve anything, the more competition and the more providers you have the better. As we see in America, it is much easier to let banks fail if you have a wide range of providers. We should face the fact that one of the major problems in the banking sector is oligopoly.
	Perhaps not intentionally but because regulators are frightened of making mistakes, the FSA is a major anti-competitive force against new banks and new banking licences. We in Metro Bank had to spend about £15 million before we were even led to hope that we might get a banking licence. The FSA changed its mind on several key factors several times and took a year and a half to decide. I certainly understand that we do not want a repeat of 1970 to 1974, when banks were given licences too easily, but we have gone a long way in the other direction. Even at a more humdrum level, all the anti-money laundering legislation requirements make it a nightmare to change your bank account. The transferability of bank accounts is now perfectly possible technically, so I should like the Bill include a requirement for the banking system to put bank account transferability in place, which would do a lot for competition. It is expensive for new banks to access the payment systems cartel. That needs opening up and the PRA should be thus empowered.
	Secondly, the PRA should be required to protect the competitiveness of this country in the financial services industry. One of my main concerns with both the Bill and the Vickers report is that we will end up making this country uncompetitive. Our banking industry is already the second most unprofitable in the world, so that will not be good news for jobs.
	On the issue of accountability and governance, I cannot see why the court should not be a proper board. The Guernsey Financial Services Commission is a proper board: we have to meet to take decisions about everything; we can sack the head of the commission if he is no good; and we are held accountable in turn. The days of the court being an ornament are gone. It should be a proper board with, bluntly, the power to sack a governor if he turns out to be no use, and the governor should certainly be properly accountable to that board.
	I conclude by saying that I give great credit and acknowledgement to my noble friend Lord Sassoon for the work he did in opposition in planning the reorganisation of our supervisory and regulatory arrangements, which was clearly needed. The gist of what is before us is very much in the right direction. I hope-and I think-that the Government realise that there are quite a few items to be thought about further and tidied up, that sufficient time will be left and that the deliberations in Grand Committee will be such that we end up with good legislation.

Viscount Hanworth: My Lords, we have waited a long time for the legislative response to the financial crisis that began in 2007. The legislative response in the USA to the great crash of 1929, occasioned by rampant speculation in the stock market, was far more rapid. Already, by 1933, the Securities Act and the Glass-Steagall Act were in place. The powerful Securities Exchange Commission was in operation by 1934. The primary purpose of the Securities Act of 1933 was to ensure that buyers of securities received complete and accurate information before making their investments. The purpose of the Glass-Steagall Act was to enforce a separation of investment banks from retail banks and to limit the risks to which the latter were exposed.
	A measure of the tardiness of the present legislative response in the UK is the fact that the recommendations of the independent commission on banking are unlikely to be enacted before 2019, by which time the financial environment in which the banks are operating may have changed considerably. We may learn something more about the Government's intentions on Thursday, when the Chancellor is due to give a speech in the Mansion House. We fear that he will have succumbed to the pressures of some intense lobbying by the banks.
	The independent commission might have been expected to recommend a clear separation of investment banking and retail banking to create a regime comparable to that of the Glass-Steagall Act. Instead, the commission has proposed that these activities should remain within the same institutions, provided that they are separated by a firewall. This will allow banks to transfer capital between their investment and their retail branches, thereby enabling them to continue to gamble with depositors' money.
	The Bill we are discussing today deals with none of the aforementioned issues. It deals instead with the minutiae of the formal relationships between the statutory authorities that are intended to constitute a new financial supervisory framework. It proposes to replace the Monetary Policy Committee with a Financial Policy Committee and to replace the Financial Services Authority with two new bodies, the Prudential Regulation Authority and the Financial Conduct Authority.
	Those new bodies are to be clustered under the umbrella of the Bank of England. They are to pass their recommendations to the Governor of the Bank of England, who will be responsible for conveying them to the Treasury and to the Chancellor of the Exchequer. The Bill will confer greatly increased powers on the governor; and a major point of contention between the Chancellor and the shadow Chancellor, which was debated in the House of Commons during Second Reading, is whether the various authorities should be allowed independent access to the Chancellor.
	Together with its Explanatory Notes, the Bill comprises 330 pages. Notwithstanding its length, it is devoid of genuine substantive content. It is extraordinary-at least to my mind-that neither the Bill nor its Explanatory Notes contain any mention of the principal leitmotifs of the financial crisis. There is no mention of credit default swaps, which allow players to place bets on the creditworthiness of assets that they do not own. There is no mention of collateralised debt obligations, which were implicated in the demise of Northern Rock. For the rules on short selling, which allows speculators to profit from tumbling asset prices, one is referred to the Financial Services and Markets Act 2000; and there is nothing much to be found there.
	There is nothing in the Bill to address the urgent need to bring the trading of financial derivatives under the auspices of an exchange, where they would be recorded and rendered transparent. In the absence of such arrangements, the preponderance of trades in derivatives will continue to be conducted over the counter; and these trades will continue be a dangerous and imponderable aspect of financial activity. There is no mention in the Bill of the Basel accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision, or of the manner in which British banks made extensive use of special purpose entities to evade these rules. These have the deceitful purpose of removing liabilities from the balance sheets and converting them into seeming assets. Doubtless it will be argued that these matters do not fall within the remit of the Bill but they do not appear to lie within the remit of any other Act, existing or proposed. If they are to be left to the discretion of the new regulatory bodies or authorities, we might ask why those authorities have not been given clear cues or promptings in this regard.
	The Government's approach in proposing this legislation has been remarkable for its conciliatory and consultative nature. There have been inputs to the draft legislation from the Treasury Select Committee of the House of Commons, from a Joint Committee of both Houses, from the European Union Committee of the House of Lords and from many other bodies besides. There has also been an indication from the Financial Secretary to the Treasury that the Government will be seeking further to amend the Bill in your Lordships' House to strengthen and refine it. All of this seems to speak of a decent diffidence in the face of highly complex and imponderable matters and of a desire to spread the responsibility for getting things right among many of the interested parties. However, this interpretation is belied by the fact that the Government have forced the Bill through the Commons at an indecent pace.
	It might seem surly to question the seeming good faith of the Government's approach. However, one's suspicions are readily alerted when one hears from senior Conservatives that a basic intention of the legislation is to avoid damaging the financial services industry. There is therefore a strong suspicion that the dilatory and protracted nature of this legislative process is a consequence of a desire to avoid interference with the profitable workings of the financial sector. If so, we are witnessing the promotion of a factional interest that has been greatly unfavourable to the rest of us.
	The legislative response of the Government to global financial services is also remarkable for its insularity. In drafting the Bill, there has been little attempt to adapt the framework for UK financial regulation to the supervisory framework of the European Union. The matter of how the two should fit together is to be dealt with in a memorandum of understanding and the details are to be left to the discretion of a regulator. Nevertheless, there seems to be a belated recognition in government circles that the UK ought to play a more active role in influencing European Union policy. This is in contrast to the attitudes evinced by the Prime Minister, who is keen to veto any provisions of the European Union that might inhibit the City of London. Thus, he has declared his unyielding opposition to a financial transactions tax, despite the fact that the European Parliament has recently voted in favour of such a tax by a substantial majority. A transactions tax would represent a much needed sedative to be administered to the financial markets and its proceeds could be used to stimulate the economy.
	Conservative politicians are aware that the British financial sector accounts for 75% of the financial activities of the European Union. No doubt they feel that this justifies the UK asserting its priority and independence in these matters. However, this figure gives a false measure of the importance of the UK's financial sector to the rest of Europe. The appropriate measure is a comparison of the size of the UK's overall economic activities with those of the rest of the European Union. Surely, if the UK proves to be intractable, the rest of Europe may agree to sideline us. The regulatory authorities of the UK have been likened to a caged canary placed in a gold mine for the purpose of giving warnings of impending explosions. However, the toxic gases of financial obfuscation are liable to overcome the bird long before it is able to sing a warning note. We have a right to expect the Government to protect us from the financial services industry. However, it seems that their legislation will not even serve to protect the industry from itself.

Lord Burns: My Lords, I begin by drawing attention to my entry in the list of Members' interests: in particular, that I am chairman of a regulated bank, Santander UK, and a shareholder in Santander Group. As we have heard from the noble Lord, Lord Sassoon, the Bill seeks to respond to the lessons of the present crisis. However, I agree with a number of speakers in this debate that we cannot lay the blame for the financial crisis entirely, or even largely, on the architecture of financial regulation. The banking crisis has been a worldwide phenomenon and, as the noble Lord, Lord Eatwell, has pointed out, at its heart was an intellectual flaw-the belief that developments in financial management techniques and globalisation gave us the opportunity to expand lending while spreading risk. This mistake was made by banks, regulators and Governments. At the same time, though, it is also widely accepted that in a number of respects the existing architecture, particularly the tripartite arrangements, did not function as well as we would have liked, and this legislation seeks to address some of those weaknesses.
	I agree with many noble Lords that the most important aspect of the Bill is the responsibility being given to the Bank of England for what has become known as macroprudential policy. However, while supporting this change, I think that we must be aware of the difficulty of the task. Like all forecasting, identifying financial bubbles is always difficult-indeed, it is almost impossible. After all, the MPC did not foresee the extent of potential effects of the bubble, and it is not clear to me why we should be confident that the FPC would have done so much better in dealing with those problems, unless it had managed to identify some automatic stabilisation mechanisms.
	We must also guard against concentrating too heavily on avoiding the pitfalls of the previous crisis. Looking back at the design of the previous legislation at the end of the 1990s, in which I had some involvement, I recall two outcomes that the Treasury sought to avoid. One was that we might end up with an unnecessary overlap of work on financial stability, with both the Bank of England and the FSA competing for influence in this area. In the event, neither organisation was doing as much as we now think appropriate. The Treasury also worried that the Bank of England was too inclined to rescue banks and wanted to build in safeguards for appropriate consultation with the Treasury as the provider of funds. The possibility set out in Alistair Darling's book that the Chancellor would be pressing the Bank without success to provide more liquidity to banks was not on the list of concerns 15 years ago. So, as well as dealing with the lessons from the most recent crisis, it is important that we also prepare for a wider set of challenges, behaviours and events. As the noble Lord, Lord O'Donnell, said in his excellent maiden speech earlier today, we need a robust framework and should not simply seek to deal with the issues that we have experienced over the past five years.
	Personally, I support the ambitions of the Bill. However, there are three areas where I see room for improvement. First, I add my support to those looking to ensure that the framework of the macroprudential policy provides sufficient safeguards to ensure that the proposed FPC adopts a symmetrical approach to macroprudential supervision-that is, it should be equally as aware of the problems of a policy being over-restrictive as it is of over-exuberance.
	The Bill has some checks and balances, requiring the FPC to avoid an adverse effect on the capacity of the financial sector to contribute to the growth of the UK economy in the medium or long term, but I question whether this is enough. That is not to say that this is not a difficult problem; we can see the difficulties in maintaining symmetry in the present situation. After all, if macroprudential policy means anything, we should now be going through a period where it is directed at supporting economic activity. However, we also have to have sympathy with the instinct of the supervisors of individual banks who want to secure the safety of the banks that they supervise by requiring increased amounts of capital and liquidity in those banks. That is, after all, one of the crucial lessons from the crisis.
	The problems in the euro area also point to strengthening the liquidity and the capital defences of the banks. My point, though, is that the systemic effect of these individual decisions has to be monitored closely and carefully so that the requirement for the safety of individual banks is balanced with a view about what is needed to support growth in the economy. For me, that would be best achieved by having a clear requirement for symmetry in the conduct of macroprudential policy. How that should be done is not an issue for today but, as a minimum and in line with the MPC's remit, the MPC needs instructions that make clear that over-rapid reductions in leverage, debt and credit growth should be judged as being just as bad as unsustainably high levels. That is very much the framework for the MPC in terms of inflation, and I do not see why it cannot be carried over into this aspect of policy as well.
	My second issue relates to the Chancellor's power of direction over the Bank of England. There seems to be general acceptance that where there is a material risk to public funds, the Chancellor should have the power of direction. I have two points to make. First, I agree with the Treasury Select Committee that in these circumstances it would be better for the Chancellor to have a general power to direct rather than the complex, circumscribed descriptions that are provided in the Bill. I understand the concerns about giving the Treasury authority to intervene in matters that have been delegated to the Bank of England, but I would rather they were dealt with by reporting and scrutiny arrangements with respect to Parliament rather than by trying to be specific about the instruments of crisis management, which stand no chance whatever of being the most appropriate ones when the time comes.
	I also have some misgivings about limiting this power of direction to when the Bank of England has determined that there is a material risk to public funds and not including occasions when the Chancellor takes the view that we are facing a material risk to the macroeconomy. Again, this is an issue of symmetry. It is not difficult to imagine circumstances in a crisis when the Chancellor feels he needs the power of direction to use public funds to support the financial system from a general macroeconomic perspective and there is a disagreement with the Bank. At times of crisis and dislocation when rapid action is needed, the Chancellor has to be clearly in the lead, and this needs to be made clear in this legislation.
	My third topic is the governance of the Bank of England. There is general acceptance that the new responsibilities of the Bank of England come with a need for new accountability mechanisms. It appears that there have been improvements in recent years in the court's oversight of the Bank of England from a perspective of the Bank's financial and resource planning, although the noble Lord, Lord Myners, questioned that earlier this afternoon. The big issue now is whether there should be an enhanced role for the court in the oversight of the policy process. I shall make a few observations. First, I agree with the Treasury Select Committee and the noble Lord, Lord Eatwell, that governance cannot be a matter for the Bank itself. The broad structures and responsibilities of the court and the main committees must be a matter for Parliament. Secondly, I agree with other noble Lords that within this framework success will depend heavily on the behaviour of the people involved and that being overprescriptive about governance is a potential trap because the prescription so often does not suit the different circumstances at the time.
	My third observation is related to this. It is that we should avoid making this too complicated. In this Bill, there is a real danger of creating multiple committees with inconsistent memberships and oversight procedures along with overlapping and overprescriptive responsibilities. I see this in a large number of cases. The Minister has indicated that the Government are looking at this, and I hope that during this legislative process some simplification can be achieved. That may involve looking at the membership, structure and oversight arrangements of the MPC as well as of the FPC, but I find it quite alarming that there is so much difference between the approaches to these two committees. It is not clear why the structure of the MPC and the FPC should not be consistent in terms of numbers, the balance between executives and external members, the principle of an annual remit from the Treasury and the oversight arrangements. Indeed, as argued by Sir John Gieve in the Financial Times today-the noble Lord, Lord Desai, has mentioned this tonight-in the fullness of time I could easily see the two committees becoming a single committee. In the mean time, I suggest that the members of the FPC who are not on the MPC should have the right to attend, but not to vote, at the MPC and vice versa for members of the MPC who would like to attend the FPC so that they get a much broader view of the concerns of both committees.
	I also agree with the Treasury Select Committee and the noble Lord, Lord Flight, that the court should act as far as possible in the style of a unitary company board. Given what has happened to so many other organisations in the public sector, it is not clear why it should not also go down this route. Under this arrangement, much is down to creating a successful working environment between the executives and the non-executives. That has to be both challenging and supportive. One important component is that there should be an appropriate and open method of reviewing decisions and the decision-making process after the event. I notice that there has been some disagreement between the court of the Bank of England and the Treasury Select Committee about the nature of reviews of policy decisions and the decision-making process and about whether policy decisions should be included or whether reviews should be only about the process.
	My clear preference is for the court to have oversight of both the process and the outcome of policy decisions. Very often this can be done internally in a way from which organisations can learn for themselves. One sees this happening in many organisations, although sometimes the issues are complex and the differences of interpretation are so sharp that an external review is the only way to do it. However, whether reviews are internal or external, they should happen and they should be allowed for in this legislation. My view is that the non-executives should commission such policy reviews. They should not conduct them, which the Treasury Select Committee suggested. In that case, one would run the risk of serious breakdown of trust within the court. However, the whole principle of reviewing policies and processes-of trying to learn what one can from past mistakes, or even successes-is a crucial part of how an organisation can improve its performance over time.

Lord Northbrook: My Lords, when the banking crisis hit the UK in 2007 and 2008, no one knew who was in charge. The tripartite authorities took a minimalist view of their respective responsibilities and necessary action fell between three stools. Thus, they failed to maintain financial stability. The tripartite system tried to segregate the regulation of banks from the management of the economy as a whole. I believe we must treat them as one part of a whole system.
	The decision to turn the Bank of England into a monetary authority was good, but it was wrong to separate out regulation into the FSA as a micro-regulator. This was likely to fail because no one was in charge of the size of banks' balance sheets-not only in the bust, as we well know, but in the boom as well. The Bill reunites the banks and other financial institutions as part of one system and I strongly recommend this.
	I will not oppose the structure of the new financial regulators, but will concentrate on possible amendments to the legislation. I emphasise, as have many other noble Lords, that a major part of the remit of either the MPC or the FPC-I am not quite sure which-should be to encourage economic growth, and that the words "reasonable" and "fair" should be added to "proportionate" in new Clause 3B on page 28. Also, the PRA should appoint practitioner and consumer panels, as well as hold a public meeting to discuss its annual report, as the FSA does.
	I also approve of the amount of consultation undertaken by the Government on these proposals. The changes made to the Bill as a result are most welcome. However, it is very important that the proposed supervisory bodies co-ordinate to represent effectively our national interest at European and international levels, including with European supervisory authorities. The financial services industry, the Government and the UK regulatory authorities all have important roles to play in representing the UK in international discussions on financial regulation. However, I draw attention to paragraph 366 of the Select Committee report, which, as many noble Lords have said, states:
	"Successful regulation depends more on the regulatory culture, focus and philosophy than on structure".
	As the noble Lord, Lord Desai, said, if regulators cannot understand the risks, no regulatory system will be sound. If the company management cannot understand them, that is even worse.
	As usual these days, the other place was given far too little time to scrutinise the Bill. In the rest of my remarks, I will focus on areas of MPs' concern that are still outstanding, especially those noted by the head of the Treasury Select Committee, Andrew Tyrie. The first concern, as many noble Lords have mentioned, is over the Court of the Bank of England. On Report in another place, a new clause was proposed to make the court more transparent and to require it to act more like a proper board. In my view, the Bank must have a board that is capable of assessing the institution's performance, but it is explicitly prohibited from doing so at present. The Minister in the other place responded favourably to this idea. Perhaps I may ask the Minister what amendments he might be tabling here.
	The second concern was that the appointment and dismissal of the governor would benefit from a parliamentary veto. I can see the attraction of this as, for instance, it might have prevented the appointment of rather weak governors as took place in the 1980s. A fixed term of eight years might be appropriate.
	Thirdly, the Financial Policy Committee and the court should publish full minutes. Currently, the Government have said that a so-called record should be published. This has not satisfied the Treasury Select Committee and I agree. Fourthly, as the noble Lord, Lord Burns, has just said, the Chancellor needs a general power to direct the Bank of England in a crisis where public funds are at stake, and not the rather strictly circumscribed powers that the Bill contains.
	Fifthly, there needs to be enhanced scrutiny of the secondary legislation that will accompany the Bank of England's macroprudential tools. The Treasury Select Committee wants a super-affirmative procedure, as mentioned by my noble friend Lady Noakes. I agree that we must have something which provides for full debate and time to consider the proposals except in emergencies.
	Sixthly, the MPC and the FPC should have a majority of external members. The Treasury Select Committee feels that it is vital in the long term to guard against "group-think" on these committees, with which I agree. Seventhly, we need to look at the Financial Conduct Authority's objectives. The FCA would work better if it focused on a simple set of objectives. The Government in the other place added to the proposals what they describe as overarching strategic objectives. But the Treasury Select Committee feels that they add nothing to the operational objectives in the Bill and might take something away by creating confusion.
	Eighthly, the FCA's accountability mechanisms need strengthening. The FCA should publish its own minutes, its chief executive should be subject to pre-appointment scrutiny and it should review its own performance without the need of the Treasury Select Committee to force it to do so. The committee managed to get the FSA to review the collapse of RBS but, apparently, it was hard work getting it to do so.
	Finally, I should like to turn to the four specific issues on which I should like the FSA and its successors to focus. The first is to avoid a repeat of the MF Global saga-the derivative trader which collapsed in October 2010. Amazingly, the organisation was considered to be outside the scope of the regulatory authority, yet its balance sheet was more than £40 billion. The capital flows between the UK and the USA were huge and there now appears to be issues of insider trading. Unless there is more co-ordination between national regulators there will be more of these crises.
	Secondly, we have the Arch Cru type of problem. Arch Cru was established in 2006 and was sold as a vehicle to provide low-risk cautious management funds. It is reminiscent of Bernie Madoff's venture. Like all investment funds, it was regulated by the FSA. Needless to say, it invested in high-risk property, shipping and ferries. Clause 64(5) states that events occurring prior to December 2001 will not be subject to the power of inquiry. As I understand it, the Government still have the power to institute an inquiry under Section 14 of the Financial Services and Markets Act 2000. I hope that they will still make use of that power and that the FCA will pay particular attention to these types of "low-risk" organisations.
	Thirdly, there is the problem of payday loans. While this may be a good and necessary route for very short-term loans, they can become a very dangerous process if allowed to continue for too long. Legislation may be difficult in this area, particularly when borrowers may not get loan finance anywhere else. I hope that the OFT investigation announced in February will produce positive results to allow reputable payday loan companies to continue but, as the right reverend Prelate the Bishop of Durham said, to ban loan sharks. Fourthly, like many others I am sure, I seem to be continually pestered by the PPI ambulance chasers. Even though I am ex-directory I get two or three calls a day. Cannot this cold calling practice be outlawed?
	Overall, this legislation is a big step forward from the legislative framework that was in place at the time of the crash and I hope that my suggestions will help to improve the Bill further.

Lord Mitchell: My Lords, I suppose this late in the debate it is stating the obvious to say that this Financial Services Bill is probably the most important Bill that is to go through in this Parliament. The stakes are high-it goes to the heart of our economy and our well-being, and we have to get it absolutely right.
	I stand in wonder at the depth of expertise of Members who have spoken in this debate, including ex-Chancellors, Treasury Ministers, civil servants and economists. I cannot help but wonder whether an elected House of Lords would be able to bring the same degree of heavyweight knowledge and practical expertise-but I guess that is a debate for another time. Now we are joined by another heavyweight, the noble Lord, Lord O'Donnell, who made a superb maiden speech. We get a very strong hint of some amazing debates with contributions that he will make in future.
	This Second Reading is, correctly, about structure, governance and regulation. We got it wrong; it needs to be restructured, making sure that power and responsibility reside where they are most effective. But enough people have spoken about that today, and I am not going to do so. I am going to talk about an issue about which I feel most passionately, and which I have spoken about before in your Lordships' House-the issue of payday loans, which was also mentioned by the noble Lords, Lord Naseby and Lord Northbrook.
	My background for 40 years was in equipment leasing. I understand compound interest-it runs through my blood-and I understand about rolling over compound interest commitments. I understand how you use public relations and advertising. My experience was in industrial not consumer finance; my customers were corporations, not desperate borrowers. But the calculations are the same, and I cannot be fooled by the hype that you see all the time on this issue.
	I have to declare an interest. I formed an equipment-leasing company in 1992 called Syscap, in which I had a majority shareholding. I have sold most of that shareholding but still retain 8%.
	In the other place there was an amendment to cap the level of interest charged by payday loan companies. In Clause 22, it was suggested that the Financial Conduct Authority should be able to make rules and apply sanctions or rules when credit is offered that the FCA judges causes consumer detriment. Consumer financing at 4,200% is detrimental to consumers, any way you look at it. We believe that that amendment, which was defeated in the other place, should be introduced.
	We have a terrible economy, with many people unemployed and people and their families in terrible situations. It is not surprising that loan sharking is back on the agenda. At its most extreme, it is about monstrous interest rates and baseball bats if payment is not made. The other week I watched "Godfather II" again and, believe me, it is very pertinent. But of course now it has gone respectable, and people talk about payday loans instead of loan sharking. Many high streets in this country have shops offering nothing but payday loans. They have become even more respectable recently; they do not even call themselves payday loans but talk about "short-term financial availability". Well, they can call it what they like, but it is loan sharking dressed in silk.
	It used to be shameful to borrow money in this way. People had to do it, but they kept it quiet. Now it is encouraged; you see it advertised on buses, TV and in sports sponsorship-it is everywhere, and it is very slick. The advertising is amazing, and they have managed to introduce an almost blokey image. "Short of a few quid, need £300? Don't worry about it-go on the website and it's in your account in 15 minutes". These companies have cutesy names such as Uncle Buck, KwikCash and, of course, Wonga.
	In 2011, payday loans equalling £1.7 billion were taken out, 4 million people in this country used them and interest rates varied from 440% to 16,500%-the mind boggles. It is rumoured that Wonga made £160 million profit and is going for an IPO of over £1 billion. You have to talk about Wonga as it is the market leader. I take my hat off to Wonga; it is a brilliant business. Its website is phenomenal-my background also lies in IT-and I have gone on to it and attempted to take out a loan. I assure your Lordships that I stopped at the final moment although I went through the process. A clock appears on the website telling you how many minutes it will take for the money to reach your bank account. The process is so easy; it is an availability issue. If you borrow £300, 21 days later you will have to repay £360. The company absolutely hates the fact that it has to display the APR rate on its website. It does so but says that it is not an interest charge and has nothing whatever to do with interest. However, for me, there is a clear definition of "interest". If you take out a loan for £100 and repay £110 in a year's time, the £10 difference is interest. That is very clear. That is the case whether you borrow for a day or 50 years-on a pro rata basis and an annualised basis, that is what an interest rate is. However, this company does everything it can to say that this is not an interest rate.
	Payday loan operators say that 95% of their customers are happy. I suppose that if you were starving hungry and somebody came along with a really sexy website, you would feel happy if it enabled you to get some food. However, it is not like that. Payplan says that 47% of people who take out payday loans have six or more facilities at the same time and that 86% of these people use them to pay for basics such as food and transport and not for luxuries or short-term loans for Christmas presents. Three organisations-Consumer Focus, Citizens Advice and the financial services panel-all want the FCA to have specific powers to control these loans. Ministers have said that this is all being reviewed, perhaps by the OFT. However, I have the feeling that this issue has been kicked into the long grass. I suspect that nothing will happen in this regard unless we up the ante.
	These payday loan companies can say what they like but the fact is this is gross usury, which affects people who are in dire financial straits, juggling credit cards, payday loans and anything else they can in order to survive from month to month. It is true that this is a vital service and that some people depend on it. Nobody can say that we have to get rid of it. The loan shark alternative is absolutely horrible. However, these companies have to be capped and need to be controlled. We plan to introduce an amendment to that effect.

Lord Teverson: My Lords, I was always rather in favour of the old FSMA system with the FSA as the one regulator. As the chief executive of a very minor fund management company, I knew where I was and where to refer to. When I rang up the FSA and asked it a question about how to operate my business, the fact that it felt unable to tell me in case that prejudiced the principles of regulation was not particularly useful, but the system was there and it was understandable. Nevertheless, it failed. That failure was not necessarily attributable to the fact that there was a single authority. Failure also occurred in the United States, which has multi-regulators comprising the Federal Reserve, the SEC and a number of others. It was quite clear that there was failure, particularly in macro-strategic risk, which was the one area missing-and it cost UK taxpayers £85 billion in bailing out the two banks. The National Audit Office put total UK taxpayer liabilities at £850 billion, or some £2,600 per taxpayer, in terms of exposure. That is truly a failure and it is why the system had to change.
	There are four areas of importance. One is a stable financial sector. Because that sector in the UK is important and because, if things go wrong, there are such large gearing and multiplier effects in terms of bailing out, we also need a stable economic system in this country. It is also important, however, that we have a successful financial sector. Although I would agree as much as anyone else that we need to make sure that other sectors of our economy are equally successful, the financial services economy accounts for some 10% or 11% of GDP and employs 1 million people. That is not just in London; even in my own region of the south-west the sector is important, and we need to ensure that it remains competitive.
	An area on which I wish to concentrate is the need to make sure that there is full competition in the sector. That is not the case in the retail banking sector-an issue mentioned strongly by my noble friend Lord Flight, and to which I shall return. The fourth important issue is the international area, not just regarding competitiveness but, given everything that is going on in the eurozone at the moment, including European banking and financial regulation. We need to make sure that our interests there are protected and that we work together with Europe to our mutual benefit.
	In terms of stability, we have moved from twin peak to triple peak or, as my noble friend Lady Kramer said, there may be a small range of mountains in terms of the different regulatory bodies. However, I very much welcome the Financial Policy Committee, which has become part of this architecture. It nevertheless has one of the most difficult tasks in terms of what it needs to achieve and in recognising the problems as they come along. I am a member of a pension committee for Cornwall as a local authority or collection of public bodies. There I was shown on a slide a definitive picture of Sweden, or possibly the whole of Scandinavia, and its debt cycle split between personal debt, corporate sector debt and public debt. It demonstrated how those matters needed to be, and were, managed. However, frankly, even as an economist, I saw very little of those issues in relation to the financial crisis. We heard about numbers but did not understand such things. The tools that are used in that area will be important.
	The degree of independence that can be operated by the Financial Policy Committee will be difficult and, as the noble Lord, Lord Burns, said, there will be a lot of challenges regarding who has what responsibilities and the way that the tools will be used. Will we go back to the rationing of mortgages and other financial instruments that I remember in my younger days, or can we control this through interest rates? Either of those will have political costs.
	Primarily, I wish to talk about competition in the retail banking sector, where there is an estimated concentration of 85% in terms of individuals and the banking market. We have the top five banks, and it was interesting to see in the Financial Times that Marks and Spencer is moving into this area, but if you look at the full picture, its banking operation is completely owned by one of the five, HSBC. That represents no more diversification than there is at the moment. We had promises from Tesco and Sainsbury's, the multiple retailers and Virgin Money of operating fully in this sector, yet we are not able to walk into any of those organisations and obtain a current account. These accounts are all promised but they do not yet exist. As has been mentioned, we have Metro Bank and internet lending through a company called Zopa, and of course we have the mutual credit organisations that have been in existence for some time. They are not mentioned specifically in the Bill but perhaps we could use them a great deal more. We need to make sure that we are able to take down the barriers, whether they be the payment system or, to some degree, the prudential requirements, but the problem is that the competition objective is very much in the area of the Financial Conduct Authority. The Bill does not talk about market concentration but it does say that the ease with which new entrants can enter the market is part of that objective. However, it will be the PRA and not the Financial Conduct Authority that will look after retail banking.
	The international aspect is important. I think that we are better at dealing with the G8 and G7 than with the EU but it is very important that we have one unified voice.
	One group that I do not see mentioned at all in the Bill is the rating agencies. Personally, I think that they have a lot to answer for in terms of the grief that we have gone through as a national and international economy, and I should be interested in understanding how any future regulation there will take place, particularly within a European context. Also, the Government have not really been able to move forward on the Financial Services Compensation Scheme, where there have been a number of problems. At the moment it is seen as a rather unfair system, particularly given Keydata and other such instances. I think that we are stalling there because of European recommendations or legislation that is coming forward, but I have a question for the Minister. At what point do we say, "Okay, we can't wait any longer. Let's change the way that the scheme works."?
	One thing is for certain: financial regulation, like democracy, is far from perfect. There is no perfect model. I was reading the magazine of the Chartered Institute for Securities and Investment, of which I am a member. It contained an article on this Bill called "Another New Dawn". At the end, it said that whatever system comes out of this Bill and however good it is, at some point in the future it will be perceived as a failure. Our challenge is to make sure that it is not at a cost of £850 billion, as was the case under FSMA.

Lord Stewartby: My Lords, this has been a remarkable debate, full of interesting and useful comments on the proposed new scheme of regulation. Having read a few pages of the Bill when it first became available, I felt a bit dizzy because it is very difficult and complex. I think that there is more than enough to keep us happy-if that is the right word-in Committee.
	Many points at issue have been discussed. I do not want to rehearse all those that have been mentioned by other noble Lords but I have some personal experience of certain areas. First, I was a member of the FSA board in the 1990s and I subsequently became chairman of the audit committees of an international bank and an insurance company. I was able to observe the changes that took place in the functioning of the internal committees within those companies and to draw some rather hesitant conclusions from them. Therefore, I should like to go back to the 1987 Act for a moment. My noble friend Lord Lawson spoke about some of the most important aspects of that at that time and I should like to pick up two of them.
	The first is that the Board of Banking Supervision was an innovative and very interesting move which unfortunately was not given the longer life that it deserved. It was an attempt to bring into consideration the practical experience of people who had been in the banking world, so that those with a lot of experience could be more conscious perhaps of the sort of qualities and experience needed to be able to do a thorough job and to spot the problem areas. That, unfortunately, as my noble friend has said, was abolished by the subsequent Chancellor, but it had shown up that a different cast of mind was needed for that role. I hope that the new regulatory system will be able to follow up that idea, and if not actually recreating the BoBS, nevertheless be very conscious of the sort of qualities and experience that are actually needed.
	It has been said by a number of noble Lords today that architecture is not the system by which you can get all these things functioning properly together. It is the people who make the difference. If people come in with a lot of practical experience, they are much more likely to spot the things that are either going wrong or which are possible problem areas that will eventually cause difficulties. That is where another point comes in. The dialogue between auditors and supervisors should for years have been a means of spreading knowledge, understanding and experience in the bodies concerned. Until 1987 conversations between the auditors and supervisors were not allowed because of the problems of preserving confidentiality between auditors and others. That restriction was removed in 1987 and it certainly needs to be a legal and obligatory part of any structure of this kind. If something were to go wrong, or if there was some suspicion that it might, auditors could report to their supervisor, which is something that from here onwards should be built into everybody's processes.
	That takes me to another area of difficulty about the valuation of derivatives and how liabilities were assessed for balance sheet purposes. I have asked a lot of people over the years how much sampling they knew about when "dodgy assets" were under consideration. The supervisory process appears to have been somewhat deficient. It did not throw up for a while the scale of misbehaviour-I suppose I could call it that; at the very least it was incompetence. Very little testing took place of these risky asset areas. I do not know why it happened, but there was a collective suspension of the critical faculties of auditors and others who dealt with these strange animals that caused so much concern. The situation is all the more curious because there were so many layers of consideration that one had to go through before one could take a relaxed view of the valuations, involving the management of the company, the company's internal audit department, the external auditors and the supervisors.
	Much also depends on the individuals involved. The role of the audit committee has been enlarged to an enormous degree over the past few years. That is necessary; the people dealing with this must be well informed. However, the audit committee must not try to second guess management. What is needed is a combination of knowledge and experience. The only thing about the Financial Policy Committee that gives me concern is that it may be too big for safety. It is a multifarious body. I am not sure how the interface between the FPC and the PRA will work. That will be critical. Purely on the grounds of the FPC's size and complexity, this is an area where I feel a degree of discomfort. However, in general I am glad that we are legislating in this way. I have no doubt that we will make many changes as we go through the Bill in detail, and I wish it well.

Baroness Drake: My Lords, the Bill replaces the tripartite system with a twin-peak model, but the witnesses to the Joint Committee of which I was a member were overwhelmingly of the view that the structure of financial regulation was not the determining factor in how successful a country was in handling a crisis. The chairman of the European Banking Authority said that,
	"during the crisis there were different types of construction that equally succeeded or failed in the face of the crisis".
	In many other countries the philosophy was a presumption that markets act rationally. The IMF Global Financial Stability Report stated in April 2006 that,
	"the dispersion of credit risk by banks to a broader and more diverse group of investors, rather than warehousing such risk on their balance sheets, has helped make the banking system and overall financial system more resilient".
	To repeat Her Majesty the Queen's question: why did no one see it coming? Clearly in 2006 the IMF did not appreciate the underlying fragility and interdependence of the financial system.
	As other noble Lords said, successful regulation depends less on the structural route taken and more on the regulatory culture, focus and philosophy. Controlling inflation and excesses in the financial system will require informed decisions that from time to time will be unpopular. That is a powerful argument for granting greater independence to the regulator to make informed rational decisions. Under the Bill, the Bank and the governor will acquire unprecedented new power. The granting of independence must be proportionate to the democratic authority vested in both the Government and Parliament. As Sir Mervyn King conceded in his 2012 "Today" programme lecture, when referring to the new powers:
	"Independence is ... not the discretion to do as you wish, but the exercise of specific powers delegated to us by Parliament to meet a remit set by Parliament".
	With independence come the responsibilities of transparency and accountability. My concern is that the Bill does not yet sufficiently address those responsibilities. For example, it provides for the Bank to notify the Chancellor when there is a material risk to public funds, and for the Chancellor to be responsible for decisions in a crisis involving such funds. It is important that the Bill gives a high level of confidence that this requirement for the bank to notify the Treasury is set at a sufficiently low level that there should be no surprises, and there must be no ambiguity as to how and when authority transfers from the governor to the Chancellor.
	The memorandum of understanding between the Treasury and the bank details the process by which the judgment of materiality will be made, not the definition. The Government argue that giving a strict definition of material risk runs counter to the emphasis on judgment. While this argument has some merit, memorandums of understanding are easy to change and lack authority. Similarly, this House should satisfy itself that there is a high level of confidence which will not be thwarted by disputes between the Treasury and the bank and that the Chancellor has sufficient powers to direct the bank in a crisis-for there will certainly be future crises-but we know that the chair of the Treasury Select Committee has expressed his concern that the Bill currently grants powers to the Chancellor that are too circumscribed.
	To fulfil its responsibilities, the Financial Policy Committee will have an armoury of powerful macroprudential tools, which Parliament should scrutinise through an enhanced affirmative procedure, to allow for consideration by Select Committees and for the Treasury to consider their recommendations. The Financial Secretary resisted such an enhanced procedure on the ground that,
	"one must ensure that the degree of scrutiny is proportionate to the powers that are being engaged in".
	Macroprudential policy enters uncharted waters and gives the FPC significant powers. I struggle to understand how the enhanced procedure is disproportionate in those circumstances.
	The draft Bill enshrined the principle of consumer responsibility but did not place an equivalent responsibility on firms. The Joint Committee recommended that the Bill,
	"place a clear responsibility on firms to act honestly, fairly and professionally in the best interests of their customers".
	The Government subsequently inserted a new principle, to which the FCA must have regard, that,
	"those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate".
	However, that does not provide a sufficient level of protection for consumers. It leaves too open the key question of what is an appropriate level of care.
	The case for complementing the principle of caveat emptor with a duty on firms is compelling. We currently have systemic inequalities of knowledge and understanding and misaligned interests between consumer and provider, with the consumer consistently the loser. Confidence in financial products has been worn down by mistrust. Professor Kay recently observed that better performing companies are ultimately the only thing that generates long-term value for savers. However, this alignment is getting lost in an ocean of intermediation, where conflicts of interest and complex and high charges exist. The chain of intermediaries in the savings and investment market is increasing.
	While there are new features in the Bill to be welcomed, the current framework still limits the ability to address such problems. Perhaps I may illustrate by reference to pensions. The asymmetries of information are well understood, as are the reasons to believe that financial education, however worth while, will never get us to a position where most consumers are capable of making rational decisions about long-term savings. Indeed, auto-enrolment, which will put millions of ordinary people saving in capital markets, is based precisely on that behavioural insight: it takes key decisions out of the hands of the saver altogether. Employers, as now, will make the big decision about which provider to choose. Consumers will save not because they have carefully weighed the costs and benefits, but out of simple inertia. A model of the consumer making active choices is inappropriate.
	The obvious next question is: does it matter in practice? I have only limited time in which to answer that question, but research by Fair Pensions suggests that it does. For example, in its survey of the top 10 commercial pension providers, oversight of external managers' investment governance appeared to be virtually non-existent. The new philosophy of judgment-led supervision includes being forward-looking in anticipating the risks that threaten market integrity. The solution to the governance gaps among those with the discretion to manage other people's money does not lie in prescribing even more boxes to tick. The Bill should create a framework in which consumers can have trust. The basic principle is simple. If you are looking after someone else's money, whether as an asset manager, an insurance company, a trustee, a consultant or any other licensed agent, the starting point should be that you must act in that person's best interests. It is changed behaviour that we need, not simply compliance.
	Finally, this Bill is not an easy read because it contains many amendments to the Financial Services and Markets Act 2000, although not to Section 348, which restricts the publication of confidential information by regulators. Consumer groups are concerned about this section. The Joint Committee shared this concern. It recommended that:
	"Neither Regulator should be unnecessarily restricted from disclosing information. Section 348 should be amended to make it as unrestrictive as is possible within the confines of EU law".
	The Treasury review commissioned by the Financial Secretary found that even with Section 348 in place, the regulator could be far more open, and as a result the FSA has committed to a fundamental review of transparency. A letter from the Financial Secretary to the right honourable Peter Lilley on 21 May 2012 states that,
	"the Government and FSA senior management are absolutely committed to embedding transparency and disclosure as a regulatory tool".
	I ask the Minister to confirm that the Government will amend legislation accordingly should the FSA conclude that that is required to achieve the commitment that the Government have made.

Viscount Trenchard: My Lords, I am grateful to my noble friend the Minister for introducing this important debate. I must first declare my interests in that I am employed by Mizuho International plc and am a non-executive director of two other financial services companies. I also wish to pay tribute to the excellent maiden speech of the noble Lord, Lord O'Donnell. If he becomes the next Governor of the Bank of England, I believe that we can easily dispense with all three deputy governor positions. In common with other noble Lords, I thank all those who served on the Joint Committee for their hard work and great contributions.
	I believe that the financial regulatory arrangements that existed during the initial stages of the financial crisis were deficient in three principal ways. However, the crisis was not caused principally because the tripartite system in itself was deficient. As other noble Lords have commented, a regulator's culture and judgment are more important than its architecture. First, there was no bank resolution mechanism in place. If the Banking Act 2009, which enabled the swift resolution of the Dunfermline Building Society insolvency, had been in place, it is likely that the Northern Rock situation would have been quickly and relatively painlessly resolved.
	Secondly, the deposit protection scheme that applied was inadequate, because it was not a 100% scheme. If today's scheme had been in place, there would not have been a bank run of such severity. Thirdly, although the Bank of England was charged with responsibility for financial stability, nobody was looking at the system as a whole. The Bank should have been given a power of direction over the FSA. Although I wholly accept my noble friend Lord Tugendhat's observations on the Bank's record as a regulator, I nevertheless believe that the body charged with financial stability should also have ultimate responsibility for regulating financial markets and their major participants.
	In 2006, I was working in Brussels as the director-general of the European Fund and Asset Management Association. It is my recollection that at that time the FSA did not consider itself an activist, firm-specific regulator, even though most of its 300 bank supervision staff had come from the Bank of England. I felt that the FSA was more interested in attending conferences and engaging with other European regulators to discuss harmonisation of regulation than actively supervising the banks. It is also clear now that the levels of capital and liquidity required under the Basel I accord were completely inadequate.
	I was privileged to serve on the Joint Committee on Financial Services and Markets under the inspired chairmanship of the noble Lord, Lord Burns, which scrutinised this Bill's predecessor before its introduction to Parliament in 1999. Some of us believed that competition and the competitiveness of our financial markets should have been made an objective of the FSA rather than merely one of the principles to which it had to have regard. I welcome the fact that the FCA is given a competition objective in the Bill, but it is inadequate in that it falls short of a responsibility to maintain or enhance the competitiveness of the UK's financial markets.
	I am not persuaded that it was necessary to dismember the FSA in order to make our regulatory system fit for purpose. Besides, the Government are trying to reduce the number of public sector bodies with all their associated costs, boards of directors, et cetera. Some 2,000 firms will now have to report to two financial regulators, the PRA and the FCA, which will demand the provision of information-in part common to both, in part different-which will require an increase for all dual-regulated companies in compliance staff and commensurate costs.
	It is interesting that we consider it appropriate to redesign our regulatory framework in this country at a time when the EU has just established a different regulatory framework based not on the twin-peaks system that we have adopted but divided between banks, securities markets and insurers, including pension providers. The matrix of reporting lines between the UK and the European regulators certainly raises the question of whether the Bank, the FCA or the PRA will have the necessary influence on any of the European regulators commensurate with the UK's status as the world's pre-eminent financial market.
	I appreciate that a lead regulator system will be adopted and that a memorandum of understanding to be drawn up by the PRA and FCA will establish arrangements for co-ordination with each other and with the three European regulators. However, I worry that the complicated matrix of communication channels that will be established as a result not only increases the risk that some vital piece of information will not be passed correctly but also makes it more likely that there will be a great deal of duplication, which is expensive for the taxpayer and for the regulated firms, which will have to satisfy the myriad of regulators' increasing hunger for ever more detailed and overlapping information on their businesses.
	The draft MoU states that the FCA and the PRA will co-ordinate with each other on rule and policy-making, although my understanding is that very little scope remains for national regulators to make rules following the establishment of the three European sectoral regulators. As far as the 2,000 firms that will be dual-regulated are concerned, the draft MoU clearly anticipates a considerable amount of duplication. It provides for the establishment of supervisory colleges for individual firms and groups comprising members of both regulatory bodies. It is important that the Treasury should monitor the escalating costs and complexity of the regulatory system, having due regard to proportionality. The fastest growing departments in many financial institutions are compliance and IT, which certainly does not help the London markets maintain their international competitiveness. RSA Insurance has incurred a dramatic increase in regulatory fees, from less than £500,000 in 2007 to more than £9 million in 2011. As the CBI has urged, the new regulatory authorities should have as a specific objective the supporting of economic growth. There must be a joined-up approach between the FPC, PRA and FCA, and between them and the three European-level regulators.
	However, as my noble friend the Minister has said, there is no best or perfect structure. If I recall correctly, he also said that the structure of the industry is at least as important as the regulatory structure. Today is not the day to debate the implementation of Sir John Vickers' recommendations, but I should like to say that the current extremely difficult economic environment should lead the Government to do what they can to provide a stable and benevolent framework for our financial services industry, which directly employs more than 2 million people and accounts for some 20% of national income. The financial sector contributes more than £60 billion in tax revenue and its markets support more than 7 million jobs in UK-incorporated companies.
	It is true that the existing single-regulator structure was not perfect either, so I do not advocate going back to it. There were difficulties in focusing clearly on prudential regulation, and pressure from consumer organisations inevitably tended to push consumer protection to the fore. Even if those difficulties could have been resolved without dismembering the FSA, we have moved on. What will be interesting is the extent to which the consumer agenda dominates the policies and strategy of the new European regulators which, as I mentioned, have not adopted the twin-peaks structure.
	The European regulators and many in Europe believe that there will eventually be no need for national regulators except as local enforcement agencies and branch supervisors. In that case, all this complicated legislation may seem redundant in 10 years' time. However, if the rapid fiscal integration now sought by the eurozone is realised, the European regulators may eventually become the regulators purely for the eurozone and our own regulators will be restored to an independent and equal status among the world's leading financial regulators.
	The new architecture is fiendishly complicated. It will no doubt be reformed again before many years have passed, as national and global markets are evolving at an accelerating pace. However, some parts of the Bill need to be improved. In certain areas, the powers of the FCA are too restricted for it to live up to the expectations placed on it. For example, the provision that it must consult before issuing warning notices should perhaps be limited. Otherwise it may effectively be prevented from doing so. The measures on greater regulatory transparency and misleading promotions are to be welcomed. The FCA should be given a power to prevent hidden charges. The objective to promote competition should be extended to maintain the competitiveness of the United Kingdom's markets, because this is surely as much in the interests of consumers as of taxpayers. The BBA has correctly stated that such a commitment would not conflict with the objective of ensuring that UK regulation is suitably robust and that it would send a strong signal that Britain was open for business if we were to commit to a competitive regulatory regime.
	Why does the Minister consider it inappropriate to give the PRA a competition objective? At least the competition principle which exists in FSMA should be retained. After all, the FSA has recently stated that the regulation of capital markets has worked well. How will the FCA, the FPC and the PRA relate to the newly created Competition and Markets Authority?
	I do not really like the name Prudential Regulation Authority because it does not make it clear that it is a regulator of financial institutions. It is surely sensible when something is reformed to give it a new name, but surely every regulator in the land is bound to exercise its functions in a prudential manner. However, I suspect that, increasingly, the PRA will be referred to as the Bank of England, of which it is indeed to be a part.
	The FCA, in fulfilling its important consumer protection role, should also have regard to its impact on the real economy, as the FPC is required to do. As my noble friend Lady Wheatcroft has already commented on that, I ask the Minister to clarify the meaning of the regulatory principle to be applied by both regulators,
	"that a burden or restriction which is imposed on a person, or on the carrying on of an activity, should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction".
	That principle is very subjective and can be interpreted in many different ways: proportionate to the benefits-for whom? Considered in general terms, which are expected to result-by whom?
	Another question identified by my noble friend Lady Noakes which needs to be closely considered is the diminished importance of the practitioner panel established under the FSMA, in particular the absence of any requirement on the PRA to establish a regular consultation mechanism such as the practitioner panel currently provides. I agree with the CBI that the FPC needs a more proactive focus on supporting economic growth. Clause 3(1) explains the financial stability strategy to be adopted by the Bank and the role of the FPC. Section 9C of the amended Bank of England Act 1998 lists the objectives of the FPC in subsections (1) to (7), but actually only subsections (1) and (2) are objectives. Subsections (3) to (7) contain parameters and principles to be followed by the committee in carrying out its two objectives. If a third objective, to promote growth, was included, the rather negative subsection (4) could be dispensed with.
	The Bank of England's new structure with three deputy governors is certainly rather complicated and the Treasury Select Committee has correctly identified the need to strengthen the Bank's governance and accountability. I hope that your Lordships' House will be able to improve the Bill to mitigate the difficulties in putting this complicated structure into practice and ensuring that the United Kingdom has a financial regulatory system which is fit for purpose and a degree of security through the unseen storms that lie ahead.

Lord Stevenson of Balmacara: My Lords, I declare an interest as chair of the Consumer Credit Counselling Service, a debt advice charity. We have been helping more than 1.3 million people in the past four years to deal with their unmanageable debts, and it is the impact of the Bill on consumers of credit on which I focus tonight. As my noble friend Lord Mitchell said recently, there should be no doubt that personal debt is still a serious problem today. Over one-third of the people counselled by the CCCS had contractual payments for unsecured consumer credit that totalled more than 50% of their income, and almost one-quarter had total outstanding debts that exceeded their monthly incomes by a factor of 20 or more.
	Of course, this is not an issue new to your Lordships' House. Enhanced consumer credit legislation was introduced in 2006 to deal with the irresponsible lending practices present then and gave the Office of Fair Trading strengthen powers to stamp out bad conduct and get rogue firms out of the market. That has been successful. It has helped to support an ongoing dialogue between government, industry and consumer groups that has got to grips with some of the problems of credit cards that have characterised personal debt through much of the previous decade, and has also allowed the OFT to tackle some of the worst conduct in the market, bringing to book many rogue firms which have badly mistreated far too many consumers.
	For this, we should commend the hard work and diligence of the OFT consumer credit team. A key challenge in transferring responsibility for consumer credit to the Financial Conduct Authority when the proposed new framework is in place will be ensuring that that expertise and experience is not lost and that there is no hiatus as the FCA takes on that role.
	However, we must also recognise, as pointed out by my noble friend Lady Drake, that the current consumer credit rating has proved to be insufficiently powerful or agile to guarantee the fair and responsible consumer credit markets that consumers need. Consumers are still being harmed by long-standing unfair practices. We have also seen problems emerging in consumer credit sectors that have grown up since the 2006 Act changes. Several noble Lords have expressed concerns about payday lending practices. We recently analysed our clients with payday loans and discovered that about one in 10 had five or more such loans at the same time and that the average amount owed on those loans was about 95% of the net monthly income of their borrowers. The 2006 Act was supposed to stop unaffordable and unsustainable use of multiple credit products as a driver of debt problems. Yet here it is, back again, albeit in a new guise.
	It is not hard to see where the weaknesses in the current regime are. The process for licensing action under the Consumer Credit Act can be very slow. Even when the OFT determines that a firm is unfit to hold a consumer credit licence, the legislation allows the firm to continue to trade and to cause consumer detriment throughout an appeals process that can take up to two years to complete. The threshold for getting a consumer credit licence is very low, even after the reforms, so it is both too easy for rogues to get into the market and too difficult for the regulator to get them out. The current regime also provides only minimal deterrence against bad practice. While the OFT indeed has a power to fine firms in respect of misconduct, it is capped at £50,000-surely far too low to deter many firms. The current legislation also forbids the OFT ordering firms directly to compensate customers who have been wronged, so firms can profit from unfair practices with little fear of being held to account.
	The credit regime is still at heart a licensing regime with neither the focus nor the reach actively to ensure that consumer credit markets work well for consumers. It needs to be refocused and reformed-and here I part company with the noble Lord, Lord Hunt of Wirral. Self-regulation undoubtedly has a part to play here but, to my mind, moving responsibility for consumer credit to the Financial Conduct Authority represents a huge opportunity to introduce greater statutory consumer protection, which is now urgently needed.
	The Financial Services and Markets Act 2000, as it will be amended by the Bill, has the power to clean up existing problems and prevent new consumer problems occurring. However, we should take this opportunity to ensure that the FCA has a formal responsibility for tough but targeted threshold conditions, effective enforcement and redress, rule-making powers to set standards for practices as well as products and a regulatory approach based on prevention and market supervision. These tools, and a Financial Conduct Authority with the appetite and mandate to use them, should be able to introduce a step change for the benefit of consumers. However, that depends on getting the implementation right, and there are still several key questions to be resolved here which we need to come back to in Committee.
	First, we need to ensure that the important substantive consumer protection measures in the Consumer Credit Act are retained, particularly those that cannot readily be replicated in an FCA rulebook. The intention is there but the detail needs to be fleshed out. Secondly, the FCA needs to develop both a rulebook and a regulatory strategy for consumer credit that are robust where they need to be but sufficiently flexible to take account of the wide variety of products and sectors in the consumer credit market. As the noble Lord, Lord O'Donnell, said in his excellent maiden speech, what we need is a robust architecture with a principled approach but with sufficient flexibility to allow for a judgmental approach to regulation.
	Other issues come into play here, several of which have been mentioned by other noble Lords. There is the balance between a proportionate rulebook and a light-touch regulatory strategy, because proportionate must also mean effective. In the past the regulator has often failed to move quickly enough to deal with consumer detriment when it saw it, let alone prevent it happening in the first place, so it will be vital for the new structure to start with a clear mindset as to what outcomes the regime needs to deliver for consumers. If we are to have a proportionate regime-and we should-it must be based on a robust assessment of the risks that consumers actually face, based on accumulated past evidence of detriment arising from unfair practices and products.
	Finally, there is a timing issue. Consumer detriment is happening now and financially vulnerable consumers cannot wait until 2014 for better protection against unfair practices and rogue firms, so I urge the Government to consider what can be done in the mean time to give the OFT, and then the FCA, more teeth to help consumers. There are some options here but I note that in the debate on this Bill in another place, the Government suggested the possibility of amending the current Consumer Credit Act to allow the OFT to prevent a firm trading new business while an appeal is pending against the regulator's determination to revoke or suspend a consumer credit licence. This could make a real difference for consumers while we wait for the new regime to come into effect. I very much hope that this approach will commend itself to the Minister when we come to the Committee stage.

Lord Hodgson of Astley Abbotts: My Lords, when one is the 36th and last speaker in a debate of this length and quality, inevitably most of one's foxes have been shot-in many cases, in fact, not so much shot as riddled. I do not want to trespass on the kindness of the House, especially at this late hour, by repeating familiar arguments.
	I declare an interest: I am chairman of two firms that are regulated by the FSA, and until recently I was chair of a third. I want to make three points about the Bill: my gloss on the architecture; something about the philosophy and culture that are currently around in the Financial Services Authority and which I fear may be transmitted to the new bodies; and an area that has been less well covered today-the question of social impact investment, which is important for the future.
	I first became involved in City regulation some 12 years ago. I was one of the first directors appointed by the Bank of England to the then new Securities and Investments Board. Experience has taught me since then, and I have served on regulatory boards since, that every crisis is always followed by cries to move the architecture around and change the bodies. Indeed, the SIB itself was the result of a crisis-a rather minor one by today's standards-in that the Bank of England suddenly became enthusiastic when it found that, rather unpleasantly, its own pension fund had been adversely affected by the activities of a firm called Barlow Clowes. The Bank immediately agreed that there needed to be one central regulator, with subsidiary regulators that could carry on more specifically focused activities. In the end, there were three such: the Securities and Futures Authority, the Investment Management Regulatory Organisation and the Personal Investment Authority. In fact, this was a triple-peak regulatory system as opposed to a double-peak one.
	Why did that system not prove successful? In a word, to follow what the noble Lord, Lord Desai, said: Barings. The overnight collapse of one of Britain's most historic merchant banks caused ripples of concern. The need for reform was given further impetus by the view that the subordinate regulators were too introverted-my noble friend Baroness Noakes referred earlier to regulatory capture-and not sufficiently accountable. We have had echoes of that today, and no doubt we will continue to in our discussions about the Bill. It was felt that a unitary approach should overcome these problems, and the FSA was the result. Now, with the events of 2008, that in turn has proved to be found wanting, and we are now going back to a more diversified structure.
	The danger of changing a structure in response to a specific crisis is that you create one that is too backward-looking. In essence, generals tend to fight the battles of the previous war. The three issues that I hope that we can explore in Committee are whether the structure permits or encourages peering into the fog of the future and taking preventive action; how the relationships between the FPC, the PRA and the SCA will be integrated and managed in a way that does not place a double or triple regulatory burden on the regulated firms; and, as many noble Lords have said, whether the system contains a sufficient element of accountability.
	So much for structure. I turn to the second issue, regulatory focus and culture, which the noble Lord, Lord Eatwell, referred to in his opening remarks, and many other noble Lords have referred to subsequently. In my view, the relationship between the Financial Services Authority and regulated firms has deteriorated in recent years. At root, the authority has given undue weight to just one of its regulatory objectives-protecting consumers. That is a perfectly respectable objective but one to which the authority has given huge weight, and in consequence it has placed insufficient weight on its other objectives, especially the need to weigh the cost of regulation, encourage innovation and consider London's competitive position. In short, the FSA has become process-driven and risk-averse.
	That focus on process has led to a number of undesirable consequences. First, there has been an increasing reluctance by firms to maintain an open relationship with their regulator. Any admission of weakness, however slight, is seized upon by the regulator, and no credit is given to the firms for having identified the weakness in the first place. That is an unproductive way to behave.
	Secondly, there has been a dramatic increase in Section 116 investigations. Section 166 of FiSMA permits the FSA to require a skilled person investigation. It is clear from debates at the FiSMA proceedings that this idea should be used sparingly, but investigations are increasingly being thrown around like confetti. It is not just the cost of the investigation or the diversion of management time; it is the feeling abroad in the City that Section 166 achieved very little other than providing the regulator with cover, so that if something subsequently goes wrong he can say, "We had a Section 166 investigation. What more could we do?".
	Thirdly, and finally, there is an abuse of power-and I use this phrase carefully-by the SIF committee. Where a person has a particularly influential position in the company, he or she requires specific approval by the FSA via the SIF committee. The SIF committee is a star chamber. It is as simple as that. Individuals can be left in regulatory limbo for months. I know of one man who has been in regulatory limbo for 11 months without recourse or redress and without being able to find out what he has been accused of because confidentiality is required by the FSA while the procedure investigation is going forward.
	This is the philosophy that is prevalent in the regulator at present, and it is one that may be transmitted to the new organisations. Therefore I agree with my noble friends Lord Hunt and Lord Flight when they call for proportionality. Looking through the Bill, I see Clause 5 and the references there, but we will really need to bottom out the practical implications of the statement of intent and what they are going to mean on the ground in the operation of the City of London.
	I now turn briefly to my third topic: social impact investment. It is something that the Government are very keen to encourage but about which the Bill is almost entirely silent. The social investment process poses particular challenges for all trustees, as well as for grant-giving foundations, especially those with a permanent endowment, but the real regulatory crunch and challenge that is relevant to this debate lies at the interface between the charity and its individual supporter or investor. The missing piece in the jigsaw at present is the ability to approach individuals about social impact investments without the need for a full Companies Act prospectus, the cost of which renders almost any scheme uneconomic. We are therefore in the counterproductive and counterintuitive position that an individual can give his or her money to a project and be certain that he or she will not get it back, but he or she cannot lend or invest it if there is any prospect of any return at all. That cannot be a sensible way of proceeding to try to encourage our fellow citizens to put money behind social impact projects that this country badly needs.
	I hope that in Committee we can discuss how we can help the social impact butterfly out of its chrysalis. We will need to create an appropriate position for the regulator and perhaps establish a class of individual supporters or investors, perhaps by creating a self-certified social investor along the existing lines of the self-certified sophisticated investor. To be fair to my noble friend on the Front Bench, it is not up to the Treasury alone. Contributions will be required from other government departments-BIS, the Ministry of Justice and the Cabinet Office-as well as, as we have covered this evening, from the professions: actuaries, investment managers and accountants. In my view, it will probably take a generation for the social impact investment movement to reach its full potential, but we need to plan now, and financial regulation, more than any other sector, holds the key, so I hope my noble friend will be able to help us during the passage of the Bill to speed this process on its way.
	I do not doubt that the events of 2008 showed weaknesses in the regulatory structure and that we will need to give the Bill very careful consideration and examination in Committee if we are to manage to create the delicate balances between risk and reward and in doing so avoid hamstringing the dynamism of the City of London.

Baroness Hayter of Kentish Town: My Lords, I start by thanking the Joint Committee for its work in scrutinising this legislation. Three of its members spoke in the debate. I join others in welcoming the maiden speech of the noble Lord, Lord O'Donnell. When we come here, we all think that we have joined the most exclusive club in London but there is a more select one-that of former Cabinet Secretaries. In his notable speech today, the noble Lord showed himself a great initiate to that club, and he can now wear the tie.
	I also particularly note the speech of my noble friend Lord Barnett, who referred to the "sexy bits" of the Bill. I have to say that I have not yet found these but I will now go back and look a little harder. I particularly thank the right reverend Prelate the Bishop of Durham, the noble Lord, Lord Sharkey, and my noble friend Lord Whitty for reminding us of those people who are denied access to financial services and of the areas where they are not available. We need to remember them.
	The aim behind the Bill is laudable. It is to reform the regulatory system to avoid a repeat of the financial crisis. Amen to that, not least because the impact of failures is borne by the taxpayer and the consumer, as the noble Lord, Lord Flight, noted. We need to reduce the risk of failure without stamping out innovation, and to have effective mechanisms for dealing with any crisis or failure. However, the delivery of the Bill is poor. Unless it is amended, it will fail to achieve that end. There are problems with both the architecture and consumer protection.
	On the architecture, Europe was noted by the noble Baroness, Lady Valentine, and the noble Viscount, Lord Trenchard. Despite the increasing importance of the new European Systemic Risk Board and the three ESAs having the powers to override our regulators on occasion, our new regulation does not map with theirs. While Europe cuts by area, with one for banking, one for securities and markets, and one for insurance and occupational pensions, the Bill cuts between prudential and conduct. This means that the FCA will sit on one body-that for securities and markets-with the PRA sitting on those for banking and insurance and pensions. No doubt some agenda items will cut across FCA and PRA responsibilities, with different officials sliding into the hot seat at different times.
	As AXA has warned:
	"There is a significant danger that the new structure will diminish the UK's capacity to influence European regulators as",
	our,
	"new ... bodies will be organised along different lines to the European Supervisory Authorities".
	Our European Union Committee warned about this last July but the Government's response was simply an MoU between the Treasury, the Bank, the PRA and the FCA. There was no recognition of any problem by the Government, despite their commitment to,
	"ensuring that the UK authorities ... take a leadership role in the ESAs",
	over the problems outlined by the committee.
	I turn to the Financial Reporting Council, which gets no mention at all in the Bill, despite its role in the corporate governance of banks, the stewardship code and the setting of standards across much of the financial industry, including on issues that affect the work of accountants, actuaries and auditors, as has been mentioned today. Therefore, we should like to see a requirement for an MoU from the FCA and the PRA to the Financial Reporting Council. The PRA, in particular, will lead in the ESAs on the rulebooks, including binding technical standards.
	I turn briefly to the Bank as it has been well covered today. Professor Julia Black has described it as,
	"about to become the most powerful central bank in the world".
	The noble Baroness, Lady Kramer, referred to the "sun king" and the noble Lord, Lord Tugendhat, to the lavish powers that it will have. In another place, David Ruffley said:
	"Not since the creation of the Bank of England ... has its senior management and Governor had so much power ... one cannot have enough scrutiny of this big beast that the Bank will become as a result of the Bill".-[Official Report, Commons, 23/4/12; col. 746.]
	The Institute of Chartered Accountants has also called for the greater accountability of the Bank to Parliament and the public. Therefore, we will need the amendments suggested by noble friend Lord Eatwell and foreshadowed by the chair of the Treasury Select Committee in the other place, Andrew Tyrie. That deals with architecture.
	Turning to consumers, there are undoubtedly things in the Bill that we welcome, not least the power to ban toxic products; the exposure of misleading financial promotions; the publication of warning notices; the supercomplaints regime; and the move of consumer credit to the FCA. I thank the Government for those. However, there are some problems, one of which is in the architecture of the FCA. To quote the words of Andrew Tyrie again, it will be the poor relation-not least because of the PRA's power of veto over it.
	Secondly, there is insufficient transparency of the FCA. We all want to see its minutes published and its chief executive subject to pre-appointment scrutiny, as was mentioned by the noble Lord, Lord Northbrook, and the Treasury Select Committee. We also need to see retained the FiSMA's current Section 11 requirement for the FCA to give reasons when it rejects the advice of the consumer panel.
	The Prudential Regulation Authority will deal with some issues that will have serious consumer implications, yet there will be no consumer input to it. It will be responsible for with-profits policy and the reattribution of orphan estates; perhaps for reserving for mis-selling with all the implications that that would have for the readiness to make redress; possibly for decisions affecting loan-to-value mortgage rates; and even, possibly, free banking rules in so far as its putative head, Andrew Bailey, has proposed outlawing these. Yet there is no consumer input to the PRA. Why is there no right for the views of the consumer panel to be heard on relevant PRA remit, along the lines suggested by my noble friend Lord Whitty, or even a consumer panel, as recommended by the noble Lord, Lord Northbrook, this evening?
	On the content as it affects consumers, the competition objective for the FCA is very welcome but it does not solve all this industry's shortcomings, because this is a failing market. There is ongoing reliability in the Bill, which was mentioned unfortunately by the noble Lord, Lord Flight, on consumer responsibility, on buyer beware-caveat emptor-and the general principle that consumers should take responsibility for their decisions.
	However, there are serious flaws to that. First, if consumers or their representatives have no say in, and cannot know about, the prudential security of a firm, how can consumers take responsibility for their choice of provider and not just of product? Secondly, how can consumers exercise caution over products, given the nature of this market? Recently, in an extraordinary statement, Philip Hammond of the Cabinet said he believes that consumers who borrowed too much during the economic boom must "accept responsibility" for their part in the financial crisis. He said that banks were not the only ones responsible but that those who took out loans, spent on credit cards or accepted large mortgages were "consenting adults".
	Perhaps he needs reminding of those daily, very attractive approaches that we as consumers were getting all the time to extend our credit. Every time our credit card debt got anywhere near the limit, it was automatically revised upwards without our knowledge. Banks sent out credit card cheques and mortgage companies approached borrowers to increase their loans. Now, we learn, bonuses depended on that.
	The Financial Services Consumer Panel warned repeatedly about self-cert mortgages. We knew that they were being given to people whose income, encouraged by the lenders, was exaggerated on the application form. These lenders were giving unsustainable loan-to-income, unsustainable loan-to-value and interest-only advances, despite the protests that we were making-I was on the Financial Services Consumer Panel-to the FSA and the culprits. The idea of consumer responsibility taking the blame seems a little wide of the mark.
	The other problem about caveat emptor is that it works in a properly functioning market where the informed consumer can make choices. It is not like that in this market where we have vulnerable consumers and new entrants. These are not repeat purchases, so it is very hard for us as consumers to learn about them. There is often long-term outcomes, so we cannot work out which are good products. There is an inability to shop around. We simply do not know enough about prices, risk, assumptions behind the products and the likely outcomes to make informed choices. There is also a real asymmetry of information.
	We must make, along the lines mentioned by my noble friend Lord Borrie, real changes to the information supplied to consumers. To make it fair, clear and not misleading is not a bad start, but information is not enough. There are so many imperfections in the market that we simply have to step in. Warm words about treating the customer fairly will not suffice without a fiduciary duty along the lines set out by my noble friend Lady Drake, which would require anyone dealing with a customer to exercise that fiduciary duty-not to be in a situation where personal interest and duty of care to the client conflict, not to profit at the expense of the client, and generally to give undivided loyalty. That has to be accepted and enforced and must enter the culture, training and rules, and it should apply as much to pension investment funds as to the retail market. Indeed, the ICAW wants the FCA to give as much attention to the conduct of the wholesale markets as it does to consumer protection. So perhaps fiduciary duty should extend far and wide.
	On culture, we need regulation focused on consumers and their long-term interests, but that needs a culture change to put consumers centre stage and for them not to be seen as a means of generating high earnings for others. Consumers pay for regulation and compliance, but they also pay for failures-but somehow they never seem to walk away with golden handshakes when all has gone wrong. We need a regulatory regime designed to protect middle and lower-middle income people, because the opportunity for them to get ripped off is so high. We need regulators with the right nose for what is going on-people to interrogate data, listen to the warning and have the right feel for what the risk dashboard is highlighting. The Chartered Insurance Institute said:
	"It will be the judgements undertaken by supervisors, and the conduct of firms, that will make the difference between regulatory success or failure".
	The noble Lord, Lord Sassoon, said that the judgments of expert supervisors will be at the heart of the new system. Amen to that-but we need to supervise those supervisors.
	That brings me to the questions of transparency and accountability. We need greater accountability and parliamentary scrutiny than is envisaged in this Bill. The proposed macroprudential tools must be via superaffirmative orders, as suggested by the noble Baroness, Lady Noakes, and the noble Lord, Lord Northbrook, and there must be proper input from the Treasury Select Committee and our own House.
	We need a successful financial industry. We need it to stimulate innovation and help to create jobs and growth; we need it to facilitate borrowing and to help people to change savings into investment and hence income for their future. That needs confidence as well as good regulation-the latter depending on the culture of an organisation and its participants as well as on the numerical results. A continuation of bankers' bonuses; excess profit-taking; no care for the clients whose savings drive all this; irresponsible risk-taking; and rewards for failure have surely had their day. We look forward to enabling this Bill, as it aims to do, to make regulation work for the whole country.

Lord Sassoon: My Lords, this debate has been every bit as rigorous and illuminating as I expected and I thank your Lordships for approaching the Bill in a thoroughly constructive and thoughtful manner. We have had many useful contributions during the afternoon and evening. Some I would characterise as sighting shots, and we had a few opening barrages. I thank in particular the noble Lord, Lord O'Donnell, for his characteristically clear, focused and constructive maiden speech, which certainly contained a number of well aimed rifle shots.
	I was delighted that my noble friends who are former Chancellors welcomed the Bill. I was also pleased that at the start of the debate the noble Lord, Lord Eatwell, said that the fundamental thinking behind the Bill was well founded. Noble Lords who have direct experience of operating within the current structure, including the noble Lords, Lord Myners and Lord Burns, recognised that the tripartite system had not lived up to expectations, to use their measured terms. We have a major piece of legislation in front of us, the importance of which is widely recognised.
	Before I get into the detail of some of the points that have been made, I wish to say a few words about the form of the Bill, as speakers, including the noble Lord, Lord Turnbull, and the noble Baroness, Lady Cohen of Pimlico, questioned the way in which it had been written as amending legislation as opposed to a wholesale rewrite of FSMA and other legislation. We thought about this approach very carefully. I appreciate that the Bill in its present form is not easy for any of us, but it is an approach that has been widely supported by consultation respondents and will minimise the extent to which regulated firms and other users of FSMA have to deal with legislative change. It should also allow for more focused scrutiny in this House and by stakeholders of the key changes in the regulatory regime. However, as I am sure noble Lords are aware, the Government have published a consolidated version of FSMA to help to show explicitly what the legislation will look like once it is amended by this Bill. That is available on the Treasury website.
	I wish to make one other preliminary remark before we get into the content of the Bill. I noted the very interesting suggestion made by the noble Lord, Lord O'Donnell, of having a standing Joint Committee to assess the new framework. It is an interesting idea but it is for Parliament and not the Government to decide how best to organise its scrutiny activities. However, I repeat that the quality of the Joint Committee's work in scrutinising the new arrangements underlines the noble Lord's point. It was good to hear from members of that committee in the debate, such as my noble friend Lady Wheatcroft, the noble Baroness, Lady Drake, and the noble Lord, Lord McFall of Alcluith. However, I am very sorry, as I am sure is the whole House, that we have been robbed of the wisdom of my former noble friend Lord Maples, who would have very much enriched today's debate.
	The hour is late. I will not take this opportunity to read a fully formed speech highlighting again why the Bill is so important to protect the UK financial services sector and the wider economy. I could reiterate the arguments, but I will use the time to answer as many of the points that have been brought up as I can. I will have to leave many others on the table for future discussion or letters as appropriate.
	I have tried to group together the points. First, I shall pick up some of the issues on the overall architecture and the cross-cutting issues. Then I will address some of the points on the Bank of England, the FPC objectives and bank governance, and another area where many important points were raised concerning access to financial services, as well as one or two of the international issues that were raised.
	On the overall architecture and some of the cross-cutting issues in the Bill, a point that was very clearly made by a number of noble Lords, including my noble friends Lord Lawson of Blaby and Lord Lamont of Lerwick, is the question of judgment and culture-architecture versus institutions. Many speakers have made the point that the culture of regulators is more important than institutional architecture. I agree of course that culture is vital but, as the noble Baroness, Lady Cohen of Pimlico, noted, architecture also matters. That is precisely why we are implementing these reforms to put in place an institutional framework that will allow a culture of focused expertise and judgment to flourish separately and distinctively within the new PRA and the FCA. That is reinforced in the Bill by, for example, imposing the legal duty to supervise firms, which will require the two bodies to develop and promote a culture of supervisory judgment.
	There were questions about what is characterised as twin-peaks regulation. I do not like that tag but let me now use it for simplicity. The importance of co-ordination between the PRA and the FCA has been stressed by my noble friend Lady Kramer and others. We agree that this is important. That is why we have proposed cross-membership of the boards of the PRA and the FCA, and it is why there is a statutory duty to co-ordinate the requirement to prepare a memorandum of understanding. These issues have been thought about.
	Let us be clear on another issue of co-ordination, which relates to crisis management and particularly the involvement of the Treasury. That issue was raised by the noble Lords, Lord Eatwell and Lord Burns, my noble friend Lady Noakes, and others. The Bill places the Bank under a hard legal duty to notify the Treasury of a risk to public funds. It is a duty that applies regardless of the amount at risk or the Bank's opinion on what should be done. That is at odds with what I heard from some noble Lords who addressed this point. The MoU also makes it clear that, if there is any doubt, the Bank must notify. The MoU also allows the Treasury to require the Bank to consider making a notification in response to a specific risk or situation.
	On one or two other cross-cutting issues, the importance of cost control and proportionality was raised by a significant number of speakers, including my noble friends Lord Flight and Lord Naseby, and the noble Lord, Lord Bilimoria. The Government agree that cost control and proportionality are fundamental. The PRA and the FCA are required to have regard to proportionality. Both regulators are of course required to carry out cost-benefit analyses and to consult on their rules, as one would expect, but there are a number of areas in which the Bill goes further than previous practice. For example, for the first time, the financial services regulators are subject to National Audit Office audit, and the NAO is able to conduct value-for-money studies. That is something new in the structure to be introduced.
	There were one or two specific questions on the scope of regulation. My noble friend Lord Flight asked about life companies and observed that they are very different from banks. I certainly agree with my noble friend on that, and it is precisely why we have a different insurance objective for the PRA and explicit provision covering the PRA's duties in the regulation of with-profits policies. My noble friend Lord Teverson raised a question on rating agencies. The reason why they are not addressed directly in the Bill is that they are now a European competence, and the lead is taken by one of the three European bodies-ESMA-with the Commission.
	Two other important areas concerning scope were raised. A number of speakers, including the noble Lord, Lord McFall of Alcluith, my noble friends Lord Lawson of Blaby and Lady Wheatcroft, and others, talked about bank auditors. As with other topics, I cannot do this justice this evening. I simply remind the House that responsibility for looking after auditors and their regulation remains with the Financial Reporting Council, and so it is not part of the Bill. The FRC is doing a significant amount of work around the scope of audit. I was pleased that my noble friend recognised that we had picked up one important issue, going back to his legislation. The practice of dialogue between auditors and regulators, which needs to be addressed, is now in the code of practice, although I heard the suggestion that it might be embodied in the legislation.
	Lastly in this area, the question of central counterparty clearing houses-another important issue-was raised by my noble friend Lady Kramer. I remind the House that there is an important European directive coming in this area-the so-called EMIR, the European Market Infrastructure Regulation-which aims to reduce systemic risk in the OTC derivatives space. We want to make sure that what we are doing in the UK fits with the architecture of EMIR, which will itself be directly applicable in the UK. I suggest that we do not want to fall into the trap of super-equivalence. On the other hand, there are provisions in the Bill for rules to be made that fit within the developing architecture of EMIR.
	I turn to some of the issues concerning the Bank of England's FPC bank governance. First, on the question of the FPC and its objective, the Government recognise that the pursuit of financial stability needs to be balanced against the wider contribution of the financial system to economic growth. As I explained at the outset, the Bill seeks to provide this balance by requiring the FPC to have regard to the proportionality of its actions and by preventing it taking any action that would have a significant adverse impact on sustainable economic growth. Having said that, I listened very carefully to the significant number of noble Lords who pointed out that there should be more recognition of growth in the FPC objective. I have already mentioned many of the speakers who addressed that point but the others included the noble Lord, Lord Mawson, who did so in his characteristic way. I cannot promise any amendments in this area. I listened very carefully but I certainly cannot promise one that directs the FPC to have specific regard to the interests of the Lower Lea Valley, although I think that the House heard very clearly all the great things that are going on there. However, I listened to the points that were made.
	Points were also raised concerning co-ordination. On the one hand, the Bill is solving the co-ordination problems by making the Bank and the governor responsible for what some characterised as everything; on the other hand, that presents challenges not only for the person of the governor but for bankers and institutions-something that my noble friend Lord Tugendhat and others brought up. Of course, I certainly accept that monetary policy, financial stability policy and prudential regulation are intimately connected. That is why having these responsibilities under one roof is the best way to ensure that co-ordination. Within that framework, in each role the governor does not act alone but is supported by external and non-executive members and others.
	There were other points made by the right reverend Prelate the Bishop of Durham and others on Bank of England governance. I said again at the outset that this is an area in which the Government recognise the need to go further, and I have listened to what has been said tonight. I was grateful to my noble friend Lord Stewartby for pointing out some of the lessons from the Board of Banking Supervision and for recognising that we cannot expect to pick up exactly what it was. However, I believe that the lessons from that experience have been picked up in the design of the PRA board. On the power of direction, I heard speakers say that they believed it to be too constrained. I do not believe that that is the case in relation to the scope that it has in special support operations and the provision of emergency liquidity in relation to the special resolution regime, but I am sure that this is something that we will come back to.
	Let me turn to a few remarks about issues on access to financial services. I will be unable to do them full justice, but there were issues around diversity of provision-specifically on mutuals. The coalition agreement makes clear the Government's commitment on mutuals. The Bill requires regulators to analyse the effect of their rules on mutuals, which is a new measure that will help to ensure the fair treatment that we want. The noble Lord, Lord Whitty, and the right reverend Prelate, raised questions about the inclusion and universal provision of financial services. They are very important questions but they are essentially questions of social policy, so are for the Government and not directly for the regulatory structure. On SME lending and questions asked by my noble friend Lord Sharkey and others, the Government are taking significant action, which we have discussed before, outside the framework of this legislation to ensure the flow of lending to SMEs. That work will continue.
	In another related area, my noble friend Lord Hodgson of Astley Abbotts talked about the importance of social impact investors. I agree with that but I question the role of the legislation that we are talking about in that area. On consumer credit regulation-important points were made again from my noble friend Lord Hunt of Wirral and others-the Government are committed to designing a proportionate model of FCA regulation for the sector. The Government will consult on this and detailed proposals will come forward early in 2013. My noble friend raised the question of self-regulation. I agree with him that self-regulation which is credible, transparent and effective is an important complement to statutory regulation. The FSA is at the moment looking at different industry codes in the credit industry considering whether, and if so, how they can be incorporated into the new FCA regime.
	On payday loans, which was addressed by the noble Lord, Lord Mitchell, the right reverend Prelate, and others, we are awaiting the research being done by Bristol University's Personal Finance Research Centre at the impact on consumers and business of introducing a cap on the total cost of credit-not an easy topic. The final report is on course to be published this summer.
	Finally in this area, I will address briefly the question of peer-to-peer lending raised by my noble friend Lord Lucas and others. The Government do not think that statutory regulation is appropriate at this point. The sector is very small and such regulation would be a barrier to new entrants and innovation. However, this is a matter that we will keep under review, and I am grateful to my noble friend for raising it.
	On confidential information and its disclosure, I was asked by the noble Baroness, Lady Drake, about the FSA review. If the FSA concludes as a result of the review that changes to primary legislation are needed, we will consider the proposals very carefully and bring forward legislation as appropriate. It is an important issue.
	A couple of points were made on the international front, which clearly is highly relevant. The first concerned the mismatch between the architecture in the UK and the developing architecture in Europe. I say to the noble Baroness, Lady Valentine, that this House probably would not want to abolish imperial measures. Certainly I do not want to abolish them. On financial supervisory architecture, we must design something that is appropriate to the UK. I draw the attention of the noble Baroness, Lady Hayter of Kentish Town, to the broad consensus in the evidence given to the Joint Committee that having a different regulatory structure to that of the European supervisory authorities would not present any issues for the UK authorities either in representing UK interests or in the way that firms in the UK are regulated.
	I am sure that we will come back at length to the question of international competitiveness that was raised by my noble friend Lord Trenchard and others. The Government's position is that it is what the regulators-the FCA and the PRA-do that will make the difference in determining whether the UK is or is not a competitive place in which to do business, not having a statement about competitiveness. It will be the high regulatory standards and the stability of the financial sector to which these will contribute-the reliability, fairness and consistency of regulation-that will be important in maintaining and driving forward the attractiveness and competitiveness of London. It is those issues that will address the substance of the point.
	A challenge was thrown down at a number of points in the debate. The noble Lords, Lord Bilimoria, Lord Barnett and Lord Burns, asked whether this structure would have prevented the recent crisis. In my opening remarks I did not mean to say-and did not say-that the structure was the direct cause of the crisis. Of course the principal cause was the behaviour of firms. However, I was in the structure between 2003 and 2005, and I know that that behaviour contributed to the severity of the impact of the crisis in the UK. No one had the responsibility, the authority or the tools to monitor the system as a whole in the way that will be provided for in the FPC. I sat in the monthly meetings of the tripartite deputies at which the stability side of the Bank, which was being significantly reduced, nevertheless came forward with very good analyses of some of the problems that were welling up.
	This was in 2005; I did not have the benefit of seeing what happened in 2006 or 2007. However, the analysis was brought forward but the Bank did not take it upon itself to do anything with it, and the FSA did not take away the lessons from the analysis. The deputy governor of the Bank and his team were doing very good work but it went nowhere. The FSA had insufficient focus on its roles as the microprudential regulator and the conduct regulator. This is why the Bill creates two new focused regulators. There was also a lack of clarity in the run-up to the crisis and the way in which it hit.
	This has been a wide-ranging debate, for which I am very grateful. The provisions in the Bill have already undergone a great deal of scrutiny-three rounds of public consultation, pre-legislative scrutiny, the attention of the Treasury Committee and its passage through another place. The Government have already shown that they are flexible and committed to making the Bill as good as it can be by amending it in response. It is already strong legislation, but I look forward to the further informed challenge that I know I will get from your Lordships in Committee and to the opportunity to improve the Bill still further. However, for now, I ask the House to give the Bill a Second Reading.

Lord Northbrook: Will the Minister write to me and the other Members who asked about strengthening the powers of the Court of the Bank of England and of non-executive members on the regulatory bodies?

Lord Sassoon: I have already said that we will go through the whole debate and respond on a range of issues that have not been picked up in my response.
	Bill read a second time.
	Motion
	 Moved by Lord Sassoon
	That the Bill be committed to a Grand Committee.

Lord Sassoon: My Lords, I beg to move that this Bill be committed to a Grand Committee.

Lord Hamilton of Epsom: My Lords, this Bill is of major importance-this is not my idea; it comes from the Minister-and is very significant indeed. However, for some reason the Minister wants to shuffle it off into the Grand Committee Room. The Bill needs close scrutiny and will bring forth the exquisite qualities of your Lordships' House. There is a massive amount of expertise here that can make positive comment on the Bill and make it better than it is today. It would be quite wrong if we were to vote for the Bill to go into the Grand Committee Room. It should be debated in Committee on the Floor of the House and I hope that the committal Motion will be negatived by the House.

Lord Foulkes of Cumnock: My Lords, it is seldom that the noble Lord, Lord Hamilton, and I agree. We were introduced into the House on the same day and I found it a privilege to be introduced on that day. However, I fully agree with him on this issue. I returned from the Recess to find this Motion on the Order Paper. I was not aware of it before and, as far as I know, there was no consultation about it. Members did not know that it was going to be remitted to a Grand Committee. I may have shown a lack of acuity in picking this up but I have discussed today the fact that many Members were not aware that it was going to be suggested that this important Bill should be committed to a Grand Committee.
	As the noble Lord, Lord Hamilton, said, this is an important issue. It may not be politically contentious but it is vital. As the Minister said, it arises to some extent from a major financial crisis that hit the headlines. He described the Bill as major legislation and, after talking with Members who have been in the House much longer than me, I believe it is very unusual for such major legislation to be remitted to a Grand Committee for discussion. As the noble Lord, Lord Hamilton, said, it would be normal for it to be taken on the Floor of the House.
	There may be other reasons-far be it from me to suggest them-why the Government want to remit the Bill to a Grand Committee, but our decisions as Members of the House should be on the merits of the Bill and not on any secondary reasons beyond the basis of the Bill.
	It would be unfortunate if we had to divide on this, so I urge the Minister to withdraw his Motion on the basis that there will be further discussion and consultation with all parties and all sides of the House. I hope he will see fit to do so.

Baroness Noakes: My Lords, it is a great pleasure to be in complete agreement with the noble Lord, Lord Foulkes, which is not an occasion I find often to celebrate.
	Having been in his position for many years, I understand completely the noble Lord, Lord Eatwell, who expressed earlier his view that we could have a more intimate discussion about issues with the Minister in Grand Committee. Equally, when I was in his position, I always took the view that Bills of major significance, which this one is, should be considered in the Chamber.
	There is a particular reason for that. When a lot of issues have to be debated and decided, the only time you can divide in Committee is when a Bill is considered by the whole House, not in Grand Committee. In Grand Committee you have one fundamental opportunity to test the opinion of the House, which is on Report because there is a restricted ability to test matters at Third Reading. So for a Bill like this, with quite a lot of issues, it would be much better for the whole House to consider them so that we can settle them in Committee. Otherwise we will have one of those invidious things where we have to consider how many issues we can deal with by 7.30 in the evening before people go away. You have to take things over from Grand Committee to the whole House on Report.
	This Bill is very significant and covers many issues. That has been reflected in our debate over the past seven hours or so. It is our responsibility as a revising Chamber to do this in the proper way by considering it not in Grand Committee but by the whole House.

Lord Myners: My Lords, I rise briefly to add my support to the views expressed by the previous speakers. There are significant issues in this Bill which require attention. They are not issues that divide on party political lines, and it is clear from today's debate that there is a wealth of information and understanding in the House. Having previously taken legislation through Committee both in the House when I was a Minister and in Grand Committee, I have no doubt that this Bill should be appropriately considered by the whole House in order to be able fully to draw upon the knowledge and expertise of your Lordships. I would enjoin the Minister to withdraw the Motion that the Bill be taken in Grand Committee in order to allow further time for discussions through the usual channels-taking into account the views which have been expressed this evening from all sides of the House.

Lord Bilimoria: My Lords, perhaps I may add that this came to a head with the Welfare Reform Bill, which was committed to a Grand Committee. I remember what a stand-off there was between the Opposition and the Government. That was a sad day for this House. In the end a compromise was reached so that much of the Bill was debated on the Floor of the House. We must be careful about the signal we send out to the country about the priority of something as major as this crisis, which has brought the country to its knees. We must be careful of the message we send out before we make this decision.

Lord Lucas: My Lords, we have to face the fact that we do not do as good a job in Grand Committee as we do in a Committee of the Whole House. There is no opportunity for Peers widely to participate in Grand Committee in the way that there is in the Chamber. Given the importance of the Bill and the depth of interest in it, I hope very much that the Government will listen to what has been said.

Lord McFall of Alcluith: My Lords, perhaps I may remind the House that Finance Bills in the other place are accorded the greatest status by being debated on the Floor of the House. If we are going to have equal status in terms of the scrutiny and examination of this Bill, the least we can do is send a message to the other place that we take this seriously, and that it has to be done on the Floor of the House.

Baroness Liddell of Coatdyke: My Lords, this should not go into Grand Committee, not least because of the historic significance of the past four years and what has happened to financial services-against the background of financial services as a major industry for this country-but also because this is a classic opportunity to showcase the wide range of expertise that is available in your Lordships' House. This is not a Bill to be put into a corner and forgotten about. It deserves-and the public deserve to see us give-the kind of detailed scrutiny that legislation of this importance merits.

Lord Sassoon: My Lords, I am a little surprised by this discussion, not because I do not think it is an important debate but there have been one or two interventions from noble Lords who unfortunately were not here to hear this point addressed during the debate.
	First, this was not a decision of mine. I will do whatever the House wants. I was not asked whether I wanted to do it one way or another and I see arguments for doing it either in Grand Committee or on the Floor of the House. This was discussed through the usual channels. I have not seen this sort of discussion in anything I have been involved in. I believe that the usual channels go through these things very carefully, and they came up with an agreement on this that I certainly am prepared to accept.
	I also heard the noble Lord, Lord Eatwell, and the noble Lord, Lord Barnett, who is not in his place at the moment, arguing during the debate that the Grand Committee was a better place to take this legislation. I think the noble Lord, Lord Eatwell, referred to the detailed scrutiny of the Bill establishing the Office for Budget Responsibility, on which I had the pleasure and the responsibility of leading. Indeed, that Bill was given very thorough, detailed scrutiny. It was a Bill of great importance-not as big as this Bill but it showed in a related area how effective the Grand Committee can be.
	The Welfare Reform Bill can hardly be said to have been an unimportant Bill. What Bill of greater importance has this House considered in the past two years? Everything I have heard suggests that the scrutiny it got in Grand Committee actually worked extremely well, notwithstanding the understandable doubts there were about it.
	I do not want to withdraw the Motion. It has been agreed by the usual channels, in which all these matters will have been debated, and I believe that we should stick with what the usual channels have agreed.

Lord Lamont of Lerwick: My Lords, I ask my noble friend to think again about this. This may have been agreed by the usual channels but it is not the usual channels that should entirely count on this; it is the will of the House. Almost all the people who have spoken in the debate are present now and a large number of them have expressed the view that this would be an unsatisfactory way of proceeding. The view has been put that this is comparable to the OBR. With great respect, I suggest that this is a much, much more important measure than the OBR.
	Secondly, the Grand Committee is a much more restricted form of scrutiny in that you cannot actually vote on amendments; you cannot have a Division. I know that it is the practice of the House that we do not have too many Divisions in Committee on the Floor of the House. None the less, the pressure on Ministers to give a clear explanation to pointed amendments when there is a threat of a Division is much greater and it makes for a much sharper and more lucid Committee when there is the possibility of a Division. Just to have debates in which there are no Divisions and there are many more Divisions on Report does not seem the best and the most satisfactory way of proceeding. I strongly urge the Minister to reconsider.

Lord Foulkes of Cumnock: The Minister has said that he personally does not mind whether the Bill is dealt with on the Floor of the House or in Grand Committee, which is very helpful. He founds his argument principally on an agreement through the usual channels-and I have great respect for the usual channels. However, I fear that, because of the recess, the usual channels may not have worked as efficiently and effectively as otherwise. If the Minister were to agree to withdraw the Motion, which would be preferable to a Division, we could have a few days to have further discussion and consultation. By that time, the groups will have met; the Cross-Benchers will have had an opportunity to meet; and we can consider this matter again. All we are doing is suggesting that this matter be postponed for three or four days.

Lord Sassoon: My Lords, I have every faith in the ability of the usual channels to work these things out very thoroughly, recess or no recess. We should do what is customary and stick with what the usual channels have agreed.

Baroness Kramer: I have relatively little experience in this area, but it is my understanding that one of the advantages of Grand Committee is the easy access to officials. If the Government are seriously considering a range of amendments, as the Minister has indicated in the debate today, I presume that the ability to discuss and negotiate those and to make sure that government amendments come forward that meet the required standard will be easier within the Grand Committee context. I am something of a novice on this, so I would take the guidance of the House.

Baroness Noakes: Perhaps I may challenge the suggestion made by the noble Baroness, Lady Kramer. While officials sit rather nearer to the Ministers in Grand Committee, I think that they take no active part. All we have is that the same number of officials sit rather closer to the Minister, so it makes very little difference in terms of determining government policy. In practice, because no decisions are made in Grand Committee, or at least they are made very rarely there, the proximity of officials is of no account whatever.

Lord Sassoon: My Lords, I hear the opposition to this Motion loud and clear. Rather than put ourselves through the agony of going through the Division Lobbies at this late hour, let me withdraw the Motion and let some more discussions go ahead.
	Motion withdrawn.

House adjourned at 11.02 pm.